LIBRARY 

THE  UNIVERSITY 
OF  CALIFORNIA 

SANTA  BARBARA 


PRESENTED  BY 

FRANCIS  M.  and  ALICE 
DE  FOREST  SEDGWICK 
in  memory  of 

CHARLES  NOYES  DE  FOREST 


TRANSPORTATION    RATES    AND 
THEIR    REGULATION 


h^^^ 


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THE  MACMILLAN  COMPANY 

HEW  YORK    •    BOSTON   •    CHICAGO  •    DALLAS 
ATLANTA   •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON   •    BOMBAY   •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


TRANSPORTATION  RATES  AND 
THEIR   REGULATION 


A   STUDY   OF   THE   TRANSPORTATION 

COSTS     OF     COMMERCE    WITH 

ESPECIAL   REFERENCE   TO 

AMERICAN   RAILROADS 


BY 

HARRY   GUNNISON    BROWN 

ASSISTANT  PROFESSOR   OF   ECONOMICS   IN 
THE  UNIVERSITY  OF  MISSOURI 


"Ntia  gorfe 
THE   MACMILLAN   COMPANY 

1925 

A  a  rights  reserved 


Copyright,  1916, 
By  the  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.     Published  April,  1916. 


J.  S.  Gushing  Co.  —  Ber^vick  <fe  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


HE 


PREFACE 

In  writing  this  book,  I  have  aimed  to  present  a  com- 
plete theory  of  transportation  rates  and  their  regulation, 
to  illustrate  this  theory  with  a  sufficient  number  of  con- 
crete cases  arising  in  actual  regulation  to  make  the 
reader  or  student  feel  that  the  presentation  is  thoroughly 
practical,  and,  throughout,  to  keep  before  the  reader  a 
reahzation  of  the  relation  of  rate  making  to  trade,  test- 
ing each  rate  structure  or  regulation  by  its  probable 
effect  in  securing  or  failing  to  secure  the  maximum  of 
really  profitable  commerce  and  the  largest  economic 
well-being  of  the  community.  Whether  a  given  level 
of  rates  is  so  high  that,  like  tariff  restrictions,  it  will 
prevent  commerce  which  ought  to  take  place,  or  whether 
it  is  so  low  (less  than  cost)  that,  like  most  bounties,  it 
will  encourage  commerce  that  ought  not  to  take  place, 
or  whether  rates  are  discriminatory  in  such  a  way  as  to 
affect  commerce  injuriously,  are  the  questions  kept 
constantly  in  view.  As  a  protective  tariff  may  prevent 
profitable  trade,  so  may  monopolistic  transportation 
rates.  As  the  protective  policy  may,  perhaps,  benefit 
persons  in  one  section  of  a  country  at  the  expense  of 
those  in  another  section,  so  discriminating  transporta- 
tion rates  may  arbitrarily  build  up  one  city  and  ruin 
another.  As  tariff  protection  may  divert  a  country's 
industry  out  of  its  most  profitable  channels,  so  may  dis- 
criminating railroad  rates  arbitrarily  encourage  one  in- 
dustry in  a  given  territory  or  section  and  discourage 
another.  As  tariff  barriers  may  further  the  develop- 
ment of  private  monopoly,   so   may  discrimination  in 


VI 


PREFACE 


rates  among  competing  shippers.  Arguments  are  pre- 
sented tending  to  show  the  uneconomy  of  the  "  basing- 
point "  system  and  of  discrimination  favoring  intrastate 
as  against  interstate  traffic.  Yet,  on  the  other  hand, 
certain  apparent  discriminations  among  places,  among 
different  kinds  of  goods,  and  between  different  direc- 
tions, are  seen,  upon  analysis,  to  be  not  quite  analogous 
to  protective  tariffs  and  bounties  but  to  be  economically 
defensible. 

That  the  inner  philosophy  of  rate  regulation  and  of 
the  general  disapproval  of  various  rate  practices  once 
common,  should  be  understood,  some  such  presentation 
of  the  principles  of  rate  making  and  of  rate  regulation 
as  is  here  offered,  would  seem  to  be  essential.  It  ought 
to  be  given  at  least  as  much  importance  and  to  be  em- 
phasized in  college  classes  at  least  as  much,  as  the  mere 
record  of  past  legislation  and  description  of  existing 
law.  Indeed,  if,  as  we  are  so  often  told,  the  principal 
function  of  our  colleges  is  to  prepare  the  younger  gen- 
eration for  citizenship,  then  the  things  they  need  to 
learn  there,  perhaps  most  of  all,  are  the  reasons  of 
public  policy  which  sometimes  do,  and  which  always 
should,  lie  back  of  and  condition  our  legislation. 

A  number  of  chapters  of  this  book  will  appear  also 
as  Part  III  of  my  Principles  of  Commerce,  shortly  to 
issue  from  the  press.  A  few  footnote  references  to 
"  Part  I  "  and  "  Part  11  "  are  to  that  other  work.  The 
present  book  is  confined  to  the  discussion  of  transporta- 
tion problems  and  is,  as  to  these,  more  complete  than 
the  other. 

I  am  under  obligation  to  The  American  Economic 
Review  for  permission  to  republish,  as  Chapter  II,  in 
practically  its  original  form,  an  article  on  The  Competi- 
tion  of   Transportation   Companies,    first    published    in 


PREFACE  vii 

December,  1914.  To  Professors  Irving  Fisher  and 
Clive  Day  of  Yale  College  and  to  the  late  Professor 
G.  S.  Callender  of  the  Sheffield  Scientific  School,  Yale 
University,  I  owe  critical  reading  of  selected  chapters. 
To  Professor  John  Bauer  of  Cornell  University  I  am 
under  obligation  for  a  careful  and  valuable  criticism  of 
practically  the  entire  book.  To  my  wife  I  am  under 
obligation  for  aid  in  gathering  data,  for  criticism 
throughout,  and  for  reading  the  proof. 

HARRY  GUNNISON    BROWN. 
Columbia,  Mo., 

February,  1916. 


TABLE   OF   CONTENTS 

CHAPTER   I 

PAGE 

The  Cost  of  Transportation 3 

§  1.  rreliminary  Remarks  on  the  Expenses  of  Railroads. 
§  2.  Classification  of  the  Expenses  of  Rail  Transportation. 
§  3.  Influence  which  these  Various  Expenses  Have  and 
Should  Have  on  the  Determination  of  Railroad  Rates. 
§  4.  Average  Railroad  Rates  as  Affected  by  Degree  of  Util- 
ization of  Railroad  Capital.  §  5.  Expenses  and  Rates  of 
"Water  Transportation.  §  6.  Comparative  Importance  of 
General  Expenses  and  Fixed  Charges,  on  Railroads,  on 
Natural  Waterways,  and  on  Canals.  §  7.  The  Proper  Basis 
of  Wharf  Charges.  §  8.  Economic  Objections  to  Monopo- 
listic Transportation  Rates.     §  9.    Summary. 

CHAPTER  II 
The  Competition  of  Transportation  Companies  .  .  37 
§  1.  Competition  of  Routes.  §  2.  Circumstances  which 
May  Make  Carriage  of  Goods  by  a  Longer  Route  More  Eco- 
nomical than  their  Carriage  by  a  Shorter  Route.  §  3.  Com- 
petition of  Directions.  §  4.  Competition  of  Locations. 
§  5.  Competition  against  Potential  Local  Self-sufhciency. 
§  6.  Two  senses  of  "  What  the  Traffic  Will  Bear." 
§  7.    Summary. 

CHAPTER   III 

Transportation  Monopoly 71 

§  1.  Monopoly  of  Rail  Transportation.  §  2.  Agreements 
between  Navigation  Companies.  §  3.  Other  Causes  of  Mo- 
nopoly in  Water  Transportation.  §  4.  The  Function  of 
Government  in  Relation  to  Transportation  Monopoly. 
§  5.    Summary. 


X  TABLE  OF  CONTENTS 

CHAPTER   IV 

PACK 

Economically   Undesirable   Rate   Discrimination   among 

Places 94 

§  1.  Competition  as  a  Cause  of  Discrimination  among 
Places.  §  2.  Economic  Loss  which  May  Flow  from  Dis- 
crimination among  Places.  §  3.  The  Uneconomy  of  Dis- 
crimination either  in  Favor  of  or  against  Imports.  §  4.  The 
Uneconomy  of  the  "  Basing  Point "  System.  §  5.  Discrimi- 
nation in  Favor  of  Intrastate  Business,  resulting  from  Orders 
of  State  Commissions.  §  6.  Discrimination  by  a  Transpor- 
tation Company  in  Favor  of  Traffic  Moving  a  Long  Distance 
over  its  Own  Lines.     §  7.    Summary. 

CHAPTER  V 
Economically  Defensible  Discrimination  among  Places  .  120 
§  1.  Discrimination  among  Places,  by  a  Roundabout 
Line.  §  2.  Discrimination  by  the  Longer  or  Longest  Line, 
when  there  is  Competition  of  Directions  or  of  Locations. 
§3.  Discrimination  by  the  Shorter  or  Shortest  Line,  when 
Such  a  Line  has  Comparatively  Light  Traffic.  §  4.  Discrimi- 
nation among  Places,  by  a  Railroad  Competing  with  a 
Water  Line.  §  5.  Discrimination  among  Places,  by  a  Rail- 
road Competing  with  Local  Self-sufficiency.  §  6.  Discrimi- 
nation in  Favor  of  Export  Traffic.  §  7.  Discrimination 
between  Directions.     §  8.    Summary. 

CHAPTER   VI 

Relative  Rates  on  Different  Goods 160 

§  1.  Why  Rates  on  Competing  Goods  should  be  in  Pro- 
portion to  Transportation  Cost.  §  2.  The  Proper  Relation 
of  Rates  on  Finished  Products  to  Rates  on  Raw  Materials. 
§  3.  When  Rates  may  Properly  be  Lower  on  Some  Kinds 
of  Goods  than  on  Others,  in  Relation  to  Cost  of  Carriage. 
§  4.    Summary. 

CHAPTER  VII 

Discrimination  among  Shippers 175 

§  1.  Methods  of  Practicing  and  of  Concealing  Discrimina- 
tion among  Shippers.  §  2.  Competition  of  Transportation 
Lines  as  Causing  this  Discrimination.     §  3.    Other  Causes 


TABLE   OF    CONTENTS  xi 

PACB 

of  Discrimination  among  Shippers.  §  4.  The  Practice  of 
Discriminating  among  Shippers,  Tested  by  the  Principles 
of  Industrial  and  Commercial  Ethics.     §  5.    Summary. 

CHAPTER   VIII 

Steps  in   the   Development  of    Rate   Regulation   in  the 

United  States 193 

§  1.  Extent  of  the  Rate- regulating  Power.  §  2.  Rate 
Regulation  by  the  State  Governments.  §  3.  The  Interstate 
Commerce  Act  of  1887.  §  4.  The  Amendment  of  1906. 
§  5.  The  Amendment  of  1910.  §  6.  Later  Legislation. 
§  7.    Summary. 

CHAPTER   IX 

Rulings     of     the     Interstate      Commerce     Commission  : 

Reasonable  Rates 219 

§  1.  Difficulty  of  the  Interstate  Commerce  Commission's 
Rate-regulating  Problem.  §  2.  Reasonable  Rates  as  Evi- 
denced by  Comparison.  §  3.  Reasonable  Rates  as  Tested 
by  Cost  of  Service.  §  4.  Earnings  as  a  Test  of  Reasonable- 
ness. §  5.  Reasonable  Rates  in  Relation  to  the  Fair  Value 
of  Railroad  Property.  §  6.  Efficiency  of  Management  in 
Relation  to  Reasonable  Rates.     §  7.    Summary. 

CHAPTER  X 

Rulings  of  the  Interstate  Commerce  Commission  :    Dis- 
crimination among  Places 244 

§  1.  Undue  Preference  in  Relation  to  Distance.  §  2.  Un- 
due Preference  in  Relation  to  Natural  Advantages  of  Loca- 
tion. §  3.  Undue  Preference  to  Traffic  Moving  Entirely  or 
Largely  over  the  Discriminating  Railroad.  §  4.  The  Long 
and  Short  Haul  Clause  and  Comparative  Size  of  Cities. 
§  5.  The  Long  and  Short  Haul  Clause,  and  Discrimination 
by  the  Longer  or  Longest  Line.  §  6.  The  Long  and  Short 
Haul  Clause  and  "  Market "  Competition.  §  7.  The  Long 
and  Short  Haul  Clause  in  its  Proper  Application  to  a  Direct 
Line  with  Light  Traffic  Competing  with  a  More  Roundabout 
Line  Having  Dense  Traffic.  §  8.  The  Long  and  Short 
Haul  Clause  and  Water  Competition.  §  9.  Import  and  Ex- 
port Rates.     §  lU.    Summary. 


xii  TABLE   OF    CONTENTS 

CHAPTER   XI 

PAGB 

Rulings  of  the  Interstate  Commerce  Commission  :  Dis- 
crimination AMONG  Different  Goods  and  among 
Shippers 281 

§  1.  Relative  Rates  on  Competing  Goods.  §  2.  Relative 
Rates  on  Raw  Material  and  Finished  Product.  §  3.  The 
Bearing  of  Water  Competition  on  the  Relation  of  Rates 
Charged  for  Carrying  Different  Kinds  of  Goods.  §  4.  Value 
of  Commodity  in  its  Relation  to  Rates.  §  5.  "  Devices  "  for 
Discrimination  among  Shippers.     §  6.    Summary. 

CHAPTER   XII 

Uneconomical  Government  Interference  with,  and  En- 
couragement of,  Transportation 299 

§  1.  Navigation  Laws.  §  2.  Subsidies  to  Native  Shipping. 
§  3.  Government  Operation  of  Merchant  Ships.  §  4.  Indi- 
rect Subsidies,  Favoring  Native  Ships  as  Compared  with 
Foreign  Ships.  §  5.  The  Free  Use  for  Navigation,  of  Gov- 
ernment-built Canals.  §  6.  The  Improvement  of  Harbors. 
§  7.  The  Improvement  of  Rivers.  §  8.  Subsidies  to  Rail- 
road Building.     §  9.    Summary. 


TRANSPORTATION    RATES   AND 
THEIR   REGULATION 


TRANSPORTATION  RATES  AND 
THEIR  REGULATION 

CHAPTER  I 
The  Cost  of  Transportation 

§1 

Preliminary  Remarks  on  the  Expenses  of  Railroads 

Before  taking  up  a  consideration  of  transportation 
rates,  or  of  economical  versus  uneconomical  carriage  of 
goods,^  we  may,  with  advantage,  analyze  transportation 
costs.  We  shall  begin  by  classifying  and  discussing  the 
expenses  of  railroad  companies.^  Scarcely  any  of  the 
expenses  which  a  railroad  company  has  to  meet  can  be 
said  to  vary  in  exact  proportion  with  the  traffic.  Even 
the  cost  of  fuel  and  the  wages  of  engineers  and  trainmen 
do  not  vary  in  exact  proportion  with  amount  of  goods 
carried,  or  in  exact  proportion  with  the  number  of  cars 
or  the  number  of  trains  hauled.  But  it  is  probably  not 
widely  false  to  state  that  such  expenses  as  these  will 
vary,  in  any  given  period,  about  as  the  number  of  trains 

'  Except  as  such  carriage  of  goods  has  already  been  considered  in  Part  II, 
Chapter  VIII. 

*  The  writer  has  found  particularly  helpful,  though  he  has  not  followed  it 
throughout,  the  analysis  of  ton  mile  cost  in  Woodlock's  Anatomy  of  a  Rail- 
road Report  and  Ton  Mile  Cost,  New  York  (S.  A.  Nelson),  igoo.  Chapters 
I  to  V,  inclusive,  of  Ton  Mile  Cost.  See  pp.  86  and  87  of  Woodlock  for  sum- 
mary of  classification. 

3 


4        TRANSPORTATION   COSTS   OF   COMMERCE 

times  the  average  number  of  miles  a  train  is  taken  during 
that  period.  If  we  bear  in  mind  that,  within  the  hmits 
permitted  by  reasonable  frequency  of  trains,  the  number 
of  cars  to  a  train  will  be,  on  the  whole,  the  best  paying 
{i.e.  the  length  of  train  will  be  the  best  paying),  then 
we  may  say  that  these  expenses  (for  fuel,  wages  of 
engineers,  etc.)  vary,  in  a  considerable  degree,  as  traffic 
varies.  Other  railroad  expenses,  however,  seem  to 
have  much  less  relation  and,  in  some  cases,  almost 
no  relation  to  the  quantity  of  transportation  business 
done. 

By  a  parallel  argument  it  may  be  shown  that  no  ap- 
preciable amount  of  a  railroad's  expenses  can  be  exactly 
allocated  to  (regarded  as  particularly  caused  by)  any 
special  traffic.  For  example,  suppose  coal  and  live 
stock  to  be  carried  in  the  same  train  load.  Much  of 
the  expense  of  carrying  is  a  joint  expense,  e.g.  the  cost 
of  fuel  and  the  wages  of  engineer  and  fireman.  If  the 
coal  and  the  live  stock  are  carried  in  the  same  train, 
it  will  appear  difficult,  if  not  impossible,  to  determine 
how  much  of  the  cost  of  running  the  train  is  a  cost  of 
carrying  coal,  and  how  much  is  a  cost  of  carr3dng  live 
stock.  Yet  when  train  loads  are  homogeneous,  made  up, 
each,  entirely  of  one  kind  of  goods,  some  expenses  may 
be  allocated,  such  as  fuel  cost,  engineer's  wages,  etc. 
It  can  be  determined,  approximately,  what  is  the  cost 
per  train  load  of  hauling  coal,  and  what  is  the  train 
load  cost  of  hauling  live  stock.  From  this  we  may 
deduce  the  cost  per  ton  mile  of  hauHng  each.  But 
there  are  other  and  more  general  railroad  expenses 
which  cannot  thus  easily  be  allocated,  or  attributed  to 
different  kinds  of  traffic,  any  more  than  they  can  be 
said  to  vary  in  proportion  to  traffic.    What  is  needed 


THE  COST  OF  TRANSPORTATION  $ 

is  a  careful  analysis  of  the  expenses  of  a  railroad,  with 
a  view  to  determining  the  relation  which  these  expenses 
have  to  amount  and  kinds  of  trafhc,  and  the  influence 
which  they  have  and  ought  to  have  on  rates. 

§2 

Classification   of  the   Expenses   of  Rail   Transportation 

In  attempting  such  an  analysis,  we  may  divide  the 
expenses  of  a  railroad  into  four  classes,  in  rough  pro- 
portion to  the  relative  exactness  with  which  these  ex- 
penses vary  as  traffic  varies,  and  in  proportion,  also, 
as  they  are  easily  and  clearly  attributable  to  different 
kinds  or  to  different  lots  of  traffic.  The  first  class  of 
expenses  of  a  railroad  company  includes  all  expenditures 
for  the  production  of  train  mileage,  train  mileage  being 
defined  as  the  total  number  of  trains  run  during  a  given 
period,  times  the  average  number  of  miles  a  train  is  run. 
The  expenses  in  this  first  class  will  be  found  to  be  the 
most  variable  and  apportionable  of  any.  Second,  there 
are  terminal  expenses,  which  are  variable  in  proportion 
to  volume  of  traffic  and  are  in  some  degree  apportionable, 
but  which  have  no  relation  to  the  distance  goods  are 
carried.  Third,  there  are  the  general  expenses,  or  pre- 
paratory and  complementary  expenses,  which  are  slightly 
variable  within  wide  Hmits,  but  which  are  not  likely  to 
vary  much,  if  at  all,  with  small  changes  in  the  volume 
of  business,  and  which  cannot,  to  any  considerable 
extent,  be  allocated,  or  attributed  to  any  special  traffic. 
The  fourth  class  is  made  up  of  the  so-called  fixed 
charges  (or  the  sunk  costs),  which,  once  the  road  has 
been  built,  are  not  at  all  variable  as  traffic  changes, 
or  at  all  attributable  to  difierent  parts  of   the   total 


d        TRANSPORTATION   COSTS  OF  COMMERCE 

business  done.^     Let  us  consider  these  four  classes  of 
railroad  expenses  in  the  above  order. 

Expenses  for  the  production  of  train  mileage  include 
some  half  dozen  different  subclasses  of  expense.  First, 
there  is  the  cost  of  production  of  locomotive  power. 
This  cost  includes  wages  of  engineers  and  firemen,  value 
of  coal  burned,  of  oil  and  tallow  used,  etc.  Second, 
there  are  expenses  for  maintenance  of  equipment,  such 
as  repairs  of  engines  and  cars.  The  third  item  among 
expenses  for  production  of  train  mileage  is  a  part  of  the 
cost  incident  to  maintenance  of  way.  Renewals  of  rails 
and  renewals  of  switches  and  of  rail  fastenings,  so  far  as 
they  are  due  to  wear  and  hence  depend  upon  the  num- 
ber of  train  miles,  are  maintenance  of  way  expenses 
which  must  be  classed  as  being  for  the  production  of  train 
mileage.  The  same  thing  is  to  be  said,  in  part,  of  ex- 
penses for  tie  renewals.  In  part,  these  renewals  are 
necessitated  by  weather  conditions  and  are  not  related 
to  the  use  made  of  the  tracks,  but  in  part  they  depend 
upon  this  use.  This  third  item  includes  also  such  repairs 
of  roadbed  as  are  not  due  to  weather  and  floods,  and 
includes,  further,  a  certain  amount  of  bridge  repairs. 
Fourth,  the  expenses  for  the  production  of  train  mileage 
include  the  cost  of  train  service  and  supplies.  This 
means  particularly  the  wages  of  trainmen,  oiling,  and, 
in  the  case  of  passenger  trains,  heating  and  lighting. 
Fifth,  there  is  the  cost  of  superintendence  and  super- 
vision in  the  movement  of  trains,  a  cost  which  depends 
in  large  part  upon  the  number  of  trains  to  be  run  and  the 
average  distance  they  are  to  be  run.  Other  expenses 
might  perhaps  be  mentioned,  which  pertain  particularly 

'  See,  however,  later  parafrraphs  of  this  section  (2),  in  which  the  possible  re- 
quirement of  additional  construction  is  discussed. 


THE  COST  OF  TRANSPORTATION  7 

to  the  production  of  train  mileage,  but  those  here  given 
are  fairly  inclusive,  and  will  at  least  serve  for  illus- 
tration. 

The  expenses  above  given  incident  to  the  production 
of  train  mileage  are  the  operating  expenses  which  vary 
in  some  approximate  proportion  with  the  trains  moved 
times  the  average  number  of  miles,  i.e.  with  train  mileage. 
They  do  not,  however,  vary  in  exact  proportion  to  the 
number  of  trains  times  the  average  number  of  miles 
that  trains  are  run,  since  trains  are  not  all  of  the  same 
length  or  loaded  with  equally  heavy  cargoes.  The  cost 
of  running  long  and  heavily  loaded  trains  is  greater  for 
the  same  distance  than  the  cost  of  running  less  heavily 
loaded  and  shorter  trains.  Yet  it  is  not  greater  in  pro- 
portion to  the  larger  amount  of  goods  carried,  until  the 
train  load  of  maximum  efficiency  has  been  reached.^ 
This  train  load  will  be,  where  circumstances  favor,  the 
largest  which  the  most  efficient  and  economical  type  of 
engine  for  the  purpose  can  conveniently  draw.  The 
cost  in  fuel  and  labor  of  drawing  such  a  train  load, 
obviously  will  not  be  twice  as  great  as  the  cost  of  draw- 
ing the  same  train  loaded  to  but  half  its  capacity  or  of 
drawing  a  train  of  half  the  length.  The  expense  of 
production  of  train  mileage  does  not,  therefore,  increase 
as  rapidly  as  business  increases,  except  in  the  case  of  a 
road  (or  part  of  a  road)  whose  volume  of  business  is 
already  so  great  as  to  permit  the  train  load  of  maximum 
economy.  Where  traffic  is  not  heavy,  the  frequency  of 
service  required  for  public  convenience  makes  impossible 
the  larger  trains  and  heavier  loading  which  otherwise 

>  The  special  case  of  traffic  taken  to  fill  cars  which  must  otherwise  be  re- 
turned empty  to  their  starting  point  is  discussed  in  Chapter  V  (of  Part 
III),  §  7- 


8        TRANSPORTATION   COSTS  OF   COMMERCE 

would  be  attempted.  The  first  class  of  expenses, 
therefore,  that  for  the  production  of  train  mileage, 
increases  as  the  amount  of  trafl&c  increases,  but  does 
not  increase,  on  the  average  road,  as  rapidly  as  traffic 
increases. 

The  second  class  is  terminal  expenses.  These,  too, 
may  properly  be  regarded  as  operating  expenses.  They 
are  the  expenses  for  loading  and  unloading  freight,  when 
this  is  done  by  the  railroad  company  transporting  it  and 
not  by  the  consignor  and  consignee.  They  include, 
also,  expenses  of  switching,  expenses  for  making  up 
trains,  expenses  incident  to  repairing  terminals,  so  far 
as  this  repairing  is  occasioned  by  the  use  of  these  ter- 
minals, and,  in  general,  expenses  incident  to  collection 
and  handUng  of  freight  and  passengers  at  terminals 
proper  and  at  intermediate  points.  The  amount  of 
freight  and  the  number  of  passengers  carried  affect 
these  expenses,  though  probably  not  proportionally,  but 
the  distances  the  freight  and  passengers  are  carried  do 
not  affect  them. 

General,  or  preparatory  and  complementary,  expenses 
constitute  the  third  great  class  of  costs.  These  general 
expenses  we  may  subdivide,  in  the  main,  into  two  sub- 
classes. First,  there  are  a  part  of  the  expenses  for 
general  direction  and  supervision,  for  clerical  work,  for 
soliciting  traffic,  etc.,  which  would  not  need  to  be  in- 
curred if  a  railroad  company  should  elect  to  do  no  busi- 
ness at  all,  but  which,  nevertheless,  vary  comparatively 
little  even  with  marked  increases  and  decreases  of  traffic, 
and  which,  with,  perhaps,  the  partial  exception  of  solicit- 
ing expenses,  can  be  allocated  hardly  at  all,  i.e.  cannot 
be  said  to  be  especially  incurred  for  this  or  that  part  of 
the  traffic.     Such  expenses  are  among  those  sometimes 


THE   COST  OF  TRANSPORTATION  9 

described  as  joint  costs  ^  of  all  the  traffic.     Second,  there 
are  many  expenditures  for  maintenance  of  plant,   such 

'As  by  Taussig  in  the  Quarterly  Journal  of  Economic!:,  iSgi,  Vol.  V,  pp. 
438-465.  Pigou,  in  his  Wealth  and  Welfare,  London  (Matmillan  &  Co.),  1912, 
pp.  215-219,  criticizes  the  view  that  railway  transportation  is  essentially  a 
business  of  joint  costs.  See,  also,  discussion  between  Professors  Taussig  and 
Pigou  in  the  Quarterly  Journal  of  Economics  for  February,  May,  and  August, 
of  1913.  While  the  method  of  approaching  the  theory  of  rates,  in  this  book, 
may  appear  to  be  essentially  that  of  the  joint  cost  theorists,  the  conclusions 
reached  have  been  carefully  qualified  in  the  text  and  in  footnotes,  and  it  is  hoped 
that  any  substantial  basis  for  criticism  on  that  score  has  been  avoided.  It 
must  be  admitted  that  the  carrying  of  (say)  two  commodities,  e.g.  wheat  and 
coal,  by  railroad,  is  not  a  case  of  joint  cost  in  quite  the  same  sense  as  the  pro- 
duction of,  for  example,  beef  and  hides.  The  transportation  of  the  wheat  and 
coal  is  a  case  of  joint  cost  (if  we  wish  to  use  that  expression),  only  in  the  sense 
that  certain  expenses  do  not  vary  proportionately  whether  trafGc  (within  wide 
limits)  is  large  or  small,  only,  that  is,  in  the  sense  that  the  plant  which  is  con- 
structed primarily,  perhaps,  to  carry  the  wheat,  cannot  be  fully  utilized  in 
transporting  the  wheat  and  may  also  be  used,  without  correspondingly  greater 
expense,  to  carry  the  coal.  But,  supposing  the  size  of  railroad  plant  of  maximum 
economy  to  have  been  reached,  a  larger  and  larger  demand  for  the  transportalion 
of  wheat  would  not  increase  —  it  would,  rather,  decrease  —  the  possible  supply 
of  the  service  of  transporting  coal.  So  long  as  the  plant  was  but  partially  utilized 
in  transporting  the  wheat,  it  might  be  possible  to  carry  the  coal  at  very  low 
rates,  because  the  relatively  constant  expenses  were  chiefly  covered  by  the 
charge  made  for  transporting  the  wheat.  But  when  the  plant  came  to  be  more 
fully  utilized,  with,  perhaps,  a  possibility  of  being  completely  utilized,  in  trans- 
porting the  wheat,  the  transportation  of  coal  would  be  a  competitive  rather  than  a 
complementary  use  of  the  plant ;  and  even  before  the  capacity  of  the  plant  was 
put  to  the  test  by  trafSc  all  of  which  was  able  to  pay  its  proportionate  share 
towards  the  general  expenses  and  fixed  charges,  the  increased  demand  for  the 
transportation  of  wheat  might  somewhat  raise  the  rates  on  the  transportation  of 
coal.  The  production  of  beef  and  hides  is  a  typical  case  of  joint  cost.  An 
increased  demand  for  beef  tends  to  raise  its  price  and  to  encourage  its  produc- 
tion. Such  increased  production  of  beef  necessarily  involves  the  first  stage  of, 
and  a  partial  meeting  of  the  expenses  of,  an  increased  production  of  hides,  and 
so  tends  to  lower  the  price  of  hides.  (See  Fisher,  Elementary  PritKiplcs  of 
Economics,  New  York  —  Macmillan  — ,  191 2,  p.  349.)  Somewhat  analogously, 
the  transportation  of  wheat,  when  this  requires  the  preliminary  construction  of 
a  railroad  plant  which  cannot  be  completely  utilized  by  carrying  wheat  only, 
may  involve  the  first  stage  of,  and  a  partial  meeting  of  the  expenses  of,  the  trans- 
portation of  coal,  and  so  may  tend  to  make  possible  the  transportation  of  coal 
at  very  low  rates.  But  a  further  increase  in  the  transportation  of  wheat  would 
decrease  rather  than  increase  the  facilities  which  might  be  available  for  the 
transportation  of  coal  and  would  be  likely  to  raise  the  rates  for  such  transporta- 
tion. 


lo      TRANSPORTATION   COSTS   OF   COMMERCE 

as  renewals  of  ties,  repairs  of  roadbed,  etc.,  which  are 
not  dependent  upon  the  amount  of  train  mileage,  which 
have,  perhaps,  very  little  relation  to  the  amount  or  kind 
of  traffic,  but  which  are  necessitated  by  weather  condi- 
tions or  other  extraneous  circumstances,  and  which  must 
be  met  to  a  degree,  if  a  railroad  company  intends  to  do 
any  business  at  all.^  Not  only  are  these  expenses  of  the 
third  class  not  dependent  upon  amount  of  traffic,  but 
they  cannot  be  allocated  to  different  kinds  of  traffic. 

Fixed  charges  constitute  the  fourth  main  class  of 
costs.^    This   class   includes   interest   on   a   company's 

•  A  very  great  decrease  of  traffic  might,  of  course,  make  possible  a  decrease  in 
the  administration  expenses  and  an  abandonment  of  part  of  the  plant,  e.g.  one 
of  several  tracks,  with  resultant  saving  of  maintenance  costs.  On  the  other 
hand,  an  increase  of  business  sufficient  to  require  additions  to  the  plant,  e.g. 
additional  trackage,  would  involve  added  expense  for  maintenance  and,  perhaps, 
supervision.  But,  within  wide  hmits,  general  expenses  are  largely  independent 
of  the  volume  of  business. 

*  The  Interstate  Commerce  Commission  has,  as  one  of  its  duties,  to  prescribe 
a  system  of  accounting  for  all  interstate  railroads.  In  carrying  out  this  duty, 
it  has  made  a  classification  of  expenses  considerably  different  from  that  above 
described.  (See  Statistics  of  Railways  in  the  United  States,  igio,  pp.  85,  86.) 
Operating  expense  accounts  of  the  railroads  are  made  to  include  items  for : 

I.  Maintenance  of  way  and  structures  (such  as  for  upkeep  of  roadbed  and 
bridges);  this  was  $425,173,389  in  the  year  ending  June  30,  1913,  for  all  the 
railroads  of  the  United  States.  (For  this  and  for  the  following  figures,  see 
Statistics  of  Railways  in  the  United  States,  1913,  pp.  50,  51,  and  52.) 

II.  Maintenance  of  equipment  (upkeep  of  engines,  cars,  etc.) ;  this  was 
$513,406,662  in  1913. 

m.  Traffic  expenses  (as  those  for  advertising  and  for  soliciting  traffic) ;  in 
1913  this  was  $63,082,500. 

IV.  Transportation  expenses  (such  as  wages  of  engineers,  trainmen,  and 
yardmen  and  cost  of  fuel),  totaling  $1,101,742,932  in  1913. 

V.  General  Expenses  (including  administration,  insurance,  etc.),  amounting 
for  all  the  roads,  in  1913,  to  $79,363,517. 

In  addition  to  these  operating  expenses,  there  are  such  fixed  charges  as 
rentals  (totaling  $133,903,01 1  in  1913)  and  interest  on  funded  debt  ($380,145,142), 
besides  a  few  minor  deductions  from  revenue. 

This  classification,  however,  though  it  may  be  much  more  practical  for  many 
purposes  of  accounting  and  supervision  than  the  one  which  we  have  followed,  is 
not  equally  significant  in  the  study  of  railway  rate  making.  For  such  operating 
expenses  as  those  pertaining  to  maintenance  of  way  and  structures  and  to  main- 


THE   COST  OF  TRANSPORTATION  ii 

debt,  rentals  which  it  may  have  obligated  itself  to  pay 
for  the  privilege  of  operating  certain  branch  lines  or 
using  certain  tracks,  and  taxes.  These  expenses  are  the 
least  variable  among  all  the  four  classes.  In  fact,  once 
a  sufl&cient  trackage  and  other  facilities  have  been  con- 
structed, most  of  them  do  not  vary  at  all  with  changes 
of  traffic.  Whether  traffic  be  large  or  inconsiderable, 
profitable  or  the  reverse,  interest  on  the  debt  must  equally 
be  paid  when  due.  Likewise  it  is  obvious  that  these 
fixed  charges  cannot  be  allocated  to  any  special  part  of 
the  traffic  of  a  road,  cannot  be  said  to  be  incurred  for  the 
sake  of  any  particular  traffic. 

But  it  may  be  objected  that  a  railroad  need  not  have 
much  of  fixed  charges,  that  it  may  have  leased  no  branch 
lines  and  may  have  no  debt,  that  its  capital  may  have 
been  raised  entirely  by  the  sale  of  stock  and  not  at  all 
by  the  sale  of  bonds.  In  that  case,  the  annual  fixed 
charges  would  have  relatively  small  or  no  importance. 
Fixed  charges,  however,  are  in  large  part  but  interest 
on  the  original  cost  of  a  railroad  system.  Interest  paid 
to  bondholders  is  interest  on  cost ;  rentals  are,  in  effect, 
interest  on  cost  (or  estimated  value)  of  branch  and  other 
leased  roads.  If,  then,  there  are  no  fixed  charges,  there 
are  at  least  sunk  costs.     These  sunk  costs  represent  the 

tenance  of  equipment,  as  well  as  the  so-called  "trafTic  expenses, "  are  in  consider- 
able degree  independent  of  amount  of  business.  In  order  to  estimate  the  charac- 
ter of  their  influence  on  rates,  we  may  with  advantage  group  a  part  of  each  of 
these  classes,  for  example,  those  for  maintenance  of  way  so  far  as  dependent  on 
weather  conditions,  with  general  expenses.  Other  maintenance  of  way  expenses, 
dependent  largely  on  amount  of  business,  may  profitably  be  grouped  with  most 
of  the  "transportation  expenses"  under  the  general  title  of  expenses  for  the  pro- 
duction of  train  /nileage.  Still  other  expenses,  drawn  from  one  or  more  of  the 
Interstate  Commerce  Commission's  categories,  may,  with  gain  to  our  study,  be 
classed  as  terminal  expenses.  Thus  we  are  naturally  led  back  to  the  division  of 
railroad  expenses  into  those  for  the  production  of  train  mileage,  terminal  ex- 
penses, general  expenses,  and  fixed  charges. 


12      TRANSPORrATION   COSTS  OF   COMMERCE 

amounts  already  invested  in  terminals,  way,  construc- 
tion, and  equipment,  including,  therefore,  both  necessary 
land  or  space,  and  the  improvements,  structures,  and 
equipment,  which  are  the  products  of  labor.  So  far  as 
the  investment  in  a  railroad  represents  borrowed  capital, 
the  annual  interest  may  be  regarded  as  a  measure  of  the 
investment  made,  and  is  entirely  independent  of  traffic. 
If  none  of  the  capital  was  borrowed  and  no  interest  has 
to  be  paid,  we  may  say  that  the  original  cost  of  building 
the  road  has  been  sunk  once  for  all  and  cannot  be  re- 
covered, however  small  the  trafi&c,  and  that  it  cannot  be 
attributed  to  any  particular  part  of  the  traffic.  The 
amount  sunk  is  equivalent  to,  and  would  have  been 
exchangeable  for,  the  perpetual  annual  interest  on 
that  amount,  and  vice  versa.  In  either  case,  this  ex- 
pense, once  the  investment  is  made,-  is  independent  of 
traffic.! 

Let  it  be  said,  in  this  connection,  that  the  fixed  charges, 
or  the  sunk  costs  of  a  great  railroad  system,  are  usually 
sums  of  great  magnitude.  A  railroad  system  is  a  highly 
capitaHstic  enterprise  even  in  a  capitaUstic  era.  In 
some  kinds  of  business,  yearly  running  expenses  are  a 
large  part  of  the  total  expenses,  and  the  initial  cost  is 
low.  But  railroading  is  a  business  of  the  opposite  type. 
However  large  are  the  yearly  expenses  of  a  road,  i.e.  the 
expenses  of  doing,  the  expense  of  becoming  overshadows 
these.  The  predominant  fact  in  a  railroad  company's 
history  is  building  the  road,  and  the  existence  and  rela- 

1  If  existing  facilities  are  insufficient  for  the  possible  traffic,  and  further  con- 
struction is  necessary,  then,  it  may  be  said,  the  cost  of  such  construction,  or 
the  annual  interest  charge  on  it,  is  occasioned  by  the  additional  traffic  sought, 
and  may  be  attributed  to  tliis  additional  traffic  which  requires  it.  Yet  here, 
again,  once  the  additional  track  laying  or  other  construction  has  been  done,  the 
sunk  costs,  or  the  fixed  charges  on  the  investment,  are  the  same  whether  the 
additional  traffic  sought  proves  to  be  heavy  or  light. 


THE   COST  OF  TRANSPORTATION  13 

live  magnitude  of  this  primary  cost  has  large  significance 
in  the  problem  of  rate  making. 

It  is  commonly  stated  that  the  railroad  business  is 
subject  to  a  law  of  decreasing  cost,  or,  as  it  is  sometimes 
expressed,  of  increasing  returns.  Taking  the  expenses 
as  a  whole,  they  do  not  increase  in  proportion  to  business. 
But  it  should  be  emphasized  that  the  tendency  to  de- 
creasing proportionate  cost  with  increasing  traffic 
appUes,  in  its  full  extent,  only  up  to  the  point  where 
the  railroad  plant  is  most  economically  utilized.  Up  to 
that  point,  increasing  traffic  will  not  correspondingly 
increase  expenses.^  After  that  point  is  reached,  greater 
business  may  require  the  expense  of  new  construction 
and  of  maintenance  of  a  larger  plant  than  before.  Until 
this  larger  plant  is  utilized  nearly  as  fully  as  was  the 
smaller  one,  total  expense  per  unit  of  business  is  likely 

•  This  is  equally  true  of  the  operation  of  other  businesses  up  to  the  point  of 
most  economical  utilization  of  their  fixed  plants.  If  we  reckon  as  fixed  charges 
the  interest  on  the  value  of  a  farm  and  the  cost  of  upkeep,  it  is  true  of  farming. 
So  long  as  additional  men  add  more  to  the  value  of  the  product  than  they  are 
paid  in  wages,  it  is  worth  while  to  utilize  the  land  more  fully,  i.e.  to  cultivate  it 
more  intensively.  Reckoning  interest  and  upkeep  expenses  as  fixed  charges, 
we  would  find  that  the  larger  labor  force  increased  the  product  by  a  greater 
percent,  than  the  total  increase  of  expense.  Nevertheless,  the  law  of  diminish- 
ing returns  is  said  to  operate,  when  the  additional  men  no  longer  add  to  the  total 
product,  in  proportion  lo  their  number.  Analogously,  a  law  of  diminishing  re- 
turns may  be  said  to  operate  for  additional  labor  (or  labor  and  rolling  stock) 
applied  to  moving  goods  over  a  fixed  railway  plant,  when  the  additional  labor  no 
longer  increases  the  hauling  capacity  of  the  railroad  in  the  same  proportion. 
Yet,  since  the  fixed  plant  need  not  be  increased,  the  greater  business  may  be 
worth  while.  In  the  sense  that  efficiency  and  profits  are  greater  in  proportion  to 
total  expense,  we  have  increasing  returns ;  in  the  sense  that  efficiency  is  (possibly) 
less  in  proportion  to  the  quantity  of  operating  labor,  we  have  diminishing  returns. 
(See  Carver,  The  Distribution  of  Wealth,  New  York  —  Macmillan  —  ,  1904,  pp. 
86-89.)  The  railroad  business  is  much  more  a  business  in  which  a  large  plant  is 
necessary  and  in  which  a  larger  plant  is  more  economical,  than  the  business  of 
agriculture,  or,  perhaps,  than  any  other  business.  And,  in  the  case  of  rail- 
roads, it  is  often  impossible  for  the  size  of  plant  of  greatest  efficiency  to  be  fully 
utilized  by  available  traffic.  Hence,  the  matter  of  utilization  of  plant  has  large 
practical  importance  in  railroad  economics. 


14      TRANSPORTATION  COSTS  OF  COMMERCE 

to  be  greater  than  before.  Whether  the  larger  plant, 
when  thus  fully  utilized,  will  be  more  economical  than 
the  smaller,  depends  upon  whether  the  size  of  plant  of 
maximum  eflSciency  has  been  reached.  The  question 
whether  there  is  increasing  economy  from  fuller  utiliza- 
tion of  an  existing  plant,  is  to  be  distinguished  from  the 
question  whether  a  few  larger,  or  more  smaller,  plants, 
bring  greater  results  in  proportion  to  the  same  expendi- 
ture. A  two-track  road  can  carry  more  than  twice  as 
much  traffic  as  a  one-track  road,  since  on  the  latter 
much  more  switching  is  required  and  trains  cannot  follow 
each  other  with  the  same  frequency.  It  is  probable 
that  a  four-track  road  can  accommodate  more  than 
twice  the  traffic  possible  on  a  two-track  road,  since  some 
of  the  tracks  can  be  used  for  fast  freight  and  passenger 
service  and  others  for  slow  freight,  thus  preventing 
interference  of  either  kind  of  service  with  the  other. 
Either  fuller  utilization  of  an  existing  plant  or,  with  still 
further  increase  of  business,  a  correspondingly  complete 
utilization  of  a  larger  and  more  efficient  plant  may, 
therefore,  mean  smaller  cost  per  unit  of  traffic. 


Influence  which  these  Various  Expenses  Have  and  Should 
Have  on  the  Determination  oj  Railroad  Rates 

We  turn  now  to  a  consideration  of  the  influences 
which  the  four  classes  of  railroad  expenses  exert  in  the 
making  of  rates.  First,  let  us  consider  expenses  for  the 
production  of  train  mileage.  These  vary  in  a  consider- 
able degree  according  to  the  business  done,  though  they 
increase,  almost  always,  in  a  less  proportion  than  the 
volume  of  business.     If  additional  business  is  taken  by 


THE   COST  OF  TRANSPORTATION  15 

a  railroad,  it  will  involve  additional  expense  for  the  pro- 
duction of  train  mileage,  but  usually  not  proportionally 
additional  expense.  If,  therefore,  rates  on  new  traffic 
cannot  be  as  high  as  on  traffic  already  assured,  it  does 
not  follow  that  a  railroad  must  refuse  this  new  traffic. 
But,  since  the  owners  of  a  railroad  do  not  care  to  do  a 
losing  business,  any  particular  traffic  which  cannot  pay 
for  the  extra  train  mileage  expense  incident  to  carrying 
it,  will,  granting  intelligent  management,  be  refused. 

It  is  not  desirable  from  the  point  of  view  of  social  or 
national  economy,  that  such  traffic  should  be  taken. 
For  it  to  be  taken,  means  that  labor  and  capital  is  de- 
voted to  this  task  when  it  could  with  greater  profit  be 
devoted  to  another,  e.g.  agriculture  or  manufacturing. 
Whatever  the  railroad  must  pay  for  this  labor  and  capi- 
tal is  presumably  not  more  than  the  labor  and  capital 
can  produce  of  actual  wealth  or  valuable  service,  if 
otherwise  used  or  employed.  To  say  that  any  traffic 
will  not  pay  for  the  additional  labor  and  capital  (e.g. 
fuel)  required  to  move  it,  is  to  say  that  the  traffic  will 
not  pay  what  the  labor  and  capital  can  produce  in  other 
lines,  and  this  is  to  say  that,  if  the  railroad  takes  such 
traffic,  industry  will  be  in  so  far  diverted  from  some  more 
profitable  to  a  less  profitable  Une. 

Second,  let  us  consider  terminal  or  station  expenses. 
These  vary  somewhat  as  the  amount  of  traffic,  but  do 
not  vary  in  proportion  to  the  average  distance  traffic  is 
carried.  Therefore,  on  the  principle  that  a  railway  com- 
pany will  not  accept  freight  offered  for  transportation 
when  to  accept  it  would  lessen  the  railway  company's 
net  profits,  any  traffic  which  cannot  pay  as  much  towards 
terminal  expenses  as  it  adds  to  these  expenses,  besides 
paying  for  the  train  mileage  costs  which  it  occasions, 


i6      TRANSPORTATION   COSTS   OF   COMMERCE 

will  be  refused.  But  these  (terminal)  expenses  will  not 
prevent  a  railroad  from  carrying  any  traffic  for  long 
distances,  even  though  this  traffic  pays  only  the  in- 
creased train  mileage  cost  which  it  occasions,  and  pays 
no  more  towards  terminal  costs  than  traffic  moving 
much  less  distances.  The  reason  is  that  the  longer 
distance  traffic  adds  no  more  to  total  terminal  expenses 
than  does  traffic  for  shorter  distances.  It  is  a  waste  of 
the  community's  labor  and  is,  therefore,  socially  un- 
desirable, that  traffic  should  be  taken  which  cannot 
pay  enough  to  meet  the  terminal  expenses  which  it 
occasions. 

Third,  we  have  to  consider  the  influence  on  rates,  of 
general  expenses.  These  expenses  do  not  vary,  in  any 
corresponding  degree,  as  traffic  varies,  but  they  will 
cease  if  a  road  is  content  to  do  no  business  whatever. 
As  a  consequence,  a  railroad  company  will  take  traffic 
which  does  not  pay  its  apparent  share  of  the  general 
expenses,  rather  than  not  to  get  this  traffic,  provided 
the  rate  which  can  be  charged  covers  the  cost  of  train 
mileage,  terminal  expenses,  and  something,  however 
little,  towards  the  general  expenses.  If  any  traffic  will 
jdeld  so  much,  a  railroad  is  better  off  with  it  than  with- 
out it,  provided  the  road's  equipment  and  plant  are  not 
too  congested  to  make  any  greater  traffic  worth  while. 
Since  the  general  expenses  have  to  be  met  before  any- 
thing is  left  over  for  profit,  it  is  better  to  take  additional 
traffic,  as  long  as  the  plant  is  not  congested,  which  will 
aid  in  paying  these  expenses,  than  not  to  take  it,  utilize 
the  plant  less  fully,  and  get  less  profit.  But  it  should 
be  emphasized  that  if  the  total  traffic  of  a  railroad  does 
not  pay  the  necessary  general  expenses,  and  if  it  is  not 
expected  to  do  so  in  future,  business  will  stop  and  the 


THE   COST  OF  TRANSPORTATION  17 

road  be  abandoned ;  ^  or  such  general  expenses  as  re- 
pairs may  cease  temporarily  to  be  met,  and  the  road 
will  be  finally  abandoned  when  it  can  no  longer  be  used 
without  its  owners  meeting  these  expenses.^ 

Social  economy  does  not  require  that  each  train  load 
of  freight  should  pay  just  as  much  towards  general 
expenses  as  every  other  train  load.  The  needs  of  the 
community  may  make  it  desirable  that  a  railroad  should 
connect  two  given  places,  A  and  B,  and  hence  that  the 
general  expenses  of  maintaining  the  system  should  be 
met,  even  if  only  certain  kinds  of  trafhc  can  be  secured 
to  carry  between  these  places.  Suppose,  however,  that 
there  is  other  traffic  which  the  plant  can  perfectly  well 
accommodate,  but  which  cannot  be  taken  if  the  charge 
for  its  carriage  covers  much  more  than  the  necessary 
train  mileage  and  terminal  expenses  incident  to  this 
carriage.  We  may  assume  that  this  traffic,  if  it  took 
place,  would  be  from  A  to  B,  that  the  goods  carried 
could  be  produced  more  cheaply  at  A  than  at  B  to  the 
extent  of  a  saving  of  $10.05  worth  of  labor  and  material. 
Assume,  also,  that  the  cost  of  labor  and  material  (fuel, 
etc.)  incident  to  carrying  the  goods,  i.e.  the  train  mileage 
expenses  and  terminal  expenses,  is  $10.  Then  it  is 
desirable  that  the  goods  should  be  carried.  There  is  a 
saving  to  the  community  of  5  cents  from  carrying  them. 
This  is  not  much,  but  it  is  something.  Since  the  general 
expenses  are  no  greater  because  of  this  traffic,  the  labor 
and  materials  required  to  carry  it  yield  a  benefit  as 
great  as  or  sHghtly  greater  than  the  same  labor  and 

1  Cf.  Fisher,  Elementary  Principlfs  of  Economics,  New  York  (Macmillan), 
1912,  p.  328. 

'Though  these  expenses  may  be  met,  temporarily,  for  the  sake  of  patronage, 
etc.,  if  there  is  hope  for  better  things  in  the  future.     Cf.  Hadley,  Railroad  Trans- 
portation, New  York  (Putnam),  1885,  pp.  70,  71. 
PART  m  —  c 


i8      TRANSPORTATION   COSTS  OF   COMMERCE 

materials  would  produce  if  otherwise  employed.  To 
carry  goods  which  pay  very  little  towards  general  ex- 
penses is  not,  therefore,  necessarily  to  divert  labor  from 
a  more  productive  into  a  less  productive  employment; 
it  may  be,  if  the  railroad  plant  is  not  already  fully 
utilized,  the  reverse.^ 

But  if  the  total  traffic  of  a  railroad  cannot  pay  enough 
to  cover  general  expenses,  then  it  is  economically  unde- 
sirable that  the  road  should  operate  and  continue  to 
carry  goods.^  For  if  the  total  traffic  cannot  pay  the 
general  expenses,  as  well  as  train  mileage  and  terminal 
expenses,  then  presumably  it  is  not  worth,  to  the  com- 
munity, the  equivalent  of  these  expenses.  In  other 
words,  the  transportation  service  yielded  by  the  railroad 
is  not  equal  in  value  to  the  services  or  the  wealth  which 
the  same  labor  (or  labor  and  materials,  e.g.  coal  ^)  could 
produce  if  devoted  to  other  industries. 

Fourth  and  last  comes  a  consideration  of  fixed  charges 
or  sunk  costs,  and  of  the  influence  which  is  or  is  not 
exerted  by  them  upon  railroad  rates.  Fixed  charges, 
or  at  least  that  part  of  them  which  represents  interest 
on  a  railroad  company's  debt,^  must  be  paid  whether 

*  If  a  portion  of  the  plant,  e.g.  a  track,  which  might  otherwise  be  abandoned, 
is  kept  up  in  order  that  any  special  part  of  the  total  possible  traffic  may  be 
taken,  in  order,  for  instance,  that  coal  may  be  carried  on  a  given  railroad  as  well 
as  wheat ;  then  the  additional  expense  of  upkeep  is  borne  for  the  sake  of  that 
special  part  of  the  traffic  and  ought  to  be  covered  by  the  rates  which  such  traffic 
pays.  But  in  practice  it  frequently  happens  that  a  given  plant,  e.g.  a  roadbed 
and  two  tracks,  is  in  any  case  required  for  a  proportion  only  of  the  possible 
business  between  two  given  places.  This  roadbed  and  these  tracks,  once  con- 
structed, can  be  more  or  less  completely  utilized  without  corresponding  varia- 
tions of  the  general  expenses,  and  without  the  possibility  of  allocating  these 
expenses  to  different  parts  of  the  business. 

*  Except  temporarily,  until  the  need  of  repairs,  etc.,  becomes  imperative. 
'  Involving,  of  course,  labor  for  its  production. 

*  Taxes  are  generally  placed  among  fixed  charges,  but  are  sometimes  levied 
on  gross  earnings  and  so  vary  with  business.     If  rentals  are  not  paid,  leased  lines 


THE  COST  OF  TRANSPORTATION  19 

trafl&c  is  large  or  small.  Stopping  the  business  and 
abandoning  the  road  will  not  relieve  the  corporation  of 
its  interest  obligations,  so  long  as  it  is  not  bankrupt. 
It  may  better  run  at  a  loss  than  not  to  run  and  thereby 
suffer  greater  loss.^  Therefore,  a  road  may  continue  to 
carry  traffic,  even  although  the  goods  carried  do  not  pay 
enough  to  meet  all  the  fixed  charges. 

Even  if,  because  it  cannot  pay  full  interest  on  its 
debt,  a  railroad  company  becomes  bankrupt,  its  plant 
is  likely  still  to  be  operated.  The  bond  holders  would 
probably  continue  to  operate  the  system  after  fore- 
closure had  given  them  control,  if  it  yielded  or  could  be 
expected  to  yield  much  beyond  general  expenses,  even 
though  the  per  cent,  profit  should  be  less  than  average 
interest  on  their  original  investment.  As  we  have  seen, 
fixed  charges  are,  in  large  part,  interest  on  a  funded 
debt,  i.e.  interest  on  that  part  of  the  sunk  cost  which 
was  met  by  bond  holders.  Taking  the  capital  as  a 
whole,  it  has  in  large  part  been  invested  once  for  aU. 
A  great  part  of  the  investment  cannot  be  withdrawn 
for  other  purposes.  It  must  be  used  as  a  railroad  or 
abandoned.  So  far  as  this  is  true  of  a  railroad  plant 
and  equipment,  the  rate  for  transporting  any  given 
traffic  will  be  made  without  any  reference  to  fixed  charges 
or  to  sunk  costs.^  The  managers  of  the  road  will  en- 
deavor, in  any  case,  to  get  for  the  road  all  the  profit  they 
can  get.  But  they  may  accept  a  rate  lower  than  a 
really  paying  rate  rather  than  not  get  traffic.  If  six  per 
cent,  cannot  be  earned,  it  is  nevertheless  better  to  earn 

must  be  surrendered.  But  there  is  nevertheless  the  sunk  cost  of  such  lines  to 
be  considered,  even  though  the  lines  become  independent. 

1  See  Hadley,  Railroad  Transportation,  pp.  70,  71. 

'  Assuming,  of  course,  that  the  rate  is  made  by  the  managers  intelligently 
and  without  government  compulsion. 


20      TRANSPORTATION   COSTS  OF   COMMERCE 

two  or  three  per  cent,  than  nothing.  Not  only,  there- 
fore, may  certain  parts  of  a  railroad's  business  pay  little 
or  nothing  towards  the  fixed  charges  or  towards  interest 
on  the  capital  investment,  but  even  the  traffic  as  a  whole 
may  be  accepted  at  rates  yielding  an  inadequate  return 
on  the  original  cost  of  the  plant  rather  than  that  traffic 
should  be  much  smaller  and  return  on  cost  still  less. 
The  fijced  charges,  or  sunk  costs,  also,  carmot  be  allo- 
cated or  attributed  to  any  special  traffic.  Provided  the 
railroad  plant  is  not  fully  utilized,  traffic  which  can  con- 
tribute but  little  above  the  incident  train  mileage  and 
terminal  costs  of  its  own  moving,  nevertheless  adds 
something  towards  general  expenses,  fixed  charges,  and 
profits,  and  is  worth  taking.^ 

It  is  desirable  from  the  point  of  view  of  the  greatest 
total  of  national  wealth,  that  the  plant  should  be  used 
even  if  the  return  realizable  is  less  than  that  which 
could  have  been  realized  in  other  industries.  In  that 
case,  it  is  true  that  the  labor  of  constructing  the  rail- 
road plant  has  been  devoted  to  a  less  profitable  instead 
of  a  more  profitable  industry.  But  this  labor  has  been 
expended  and  cannot  be  reclaimed.  If  the  results  of  its 
application  are  not  cast  aside,  i.e.  if  the  railroad  plant 

'  By  way  of  qualification  it  should  be  said  that  if  a  road  is  congested  and  can- 
not carry  all  the  traffic  offered,  then  the  traffic  which  can  pay  least  is  the  traffic 
which  it  should  reject ;  and  additional  trackage  should  not  be  constructed  for 
this  traffic  unless  the  rates  chargeable  can  be  expected  to  yield  fair  returns  on 
the  cost  of  such  further  construction.  But  it  is  apt  to  be  the  case,  in  practice, 
that  the  trackage  which  is  in  any  case  required  for  a  considerable  amount  of  well- 
pajdng  traffic,  is  also  sufficient  for  the  accommodation  of  other  traffic  which  is, 
therefore,  worth  taking  even  at  somewhat  lower  rates.  Also,  if  additional 
trackage  is  mistakenly  constructed  for  traffic  which  proves  to  be  relatively 
unprofitable,  it  may  nevertheless  pay  better  to  take  this  traffic  at  low  rates 
than  to  refuse  it.  It  should  be  hardly  necessary  to  add  that  if  a  railroad  com- 
pany's trackage,  bridges,  stations,  etc.,  are  capable  of  doing  more  work  without 
additional  construction,  it  may  be  desirable  to  take  additional  traffic  at  low 
rates,  even  though  this  traffic  necessitates  some  increase  of  rolling  stock. 


THE  COST  OF  TRANSPORTATION  21 

which  has  been  constructed  is  used,  the  labor  of  using 
it  may  produce  as  much  as  and  even  more  than  it  could 
produce  if  otherwise  directed.  It  may  produce  not 
only  its  own  proper  return  but  some  return,  however 
inadequate,  on  the  misdirected  labor  of  construction. 
The  labor  of  construction  plus  the  labor  of  utilization 
may  produce  a  less  value  return  than  if  it  had  been 
otherwise  directed ;  yet  since  the  labor  of  construction 
has  been  expended,  the  labor  of  utilization  may  add 
more  to  the  net  welfare  of  the  community  than  if  it 
were  turned  to  other  channels  and  the  railroad  plant 
abandoned. 

Cost  of  construction  of  plant  influences  railroad  rates 
in  so  far  as  this  cost  lies  in  the  future.  If  it  is  believed 
that  a  railroad  in  any  given  territory  and  connecting 
any  given  points  cannot  get  traffic  enough  or  charge 
high  enough  rates  to  earn  average  profit  or  interest  on 
the  investment,  capital  will  not  be  forthcoming  for  its 
construction.  If  a  railroad  already  built  cannot  get 
sufficient  traffic  or  charge  sufficiently  high  rates,  to  earn 
as  large  interest  returns  as  most  other  lines  of  business, 
competing  roads  are  less  likely  to  be  built ;  its  own  lines 
are  less  likely  to  be  extended;  the  supply  of  transpor- 
tation is  thus  kept  down;  and  transportation  rates 
tend  to  be  kept  from  falling  further.  Even  expendi- 
tures for  repairs  which  are  made  for  the  sake  of  traflSc 
during  a  period  of  several  years  to  come  and  which  are, 
therefore,  of  the  nature  of  permanent  investment,  will 
not  be  made  if  it  is  believed  that  interest  on  these  expend- 
itures will  never  be  realized.  It  is  desirable  from  the 
viewpoint  of  national  wealth  that  this  should  be  the 
case,  that  further  direction  of  labor  into  a  relatively 
unprofitable  line  should  be  prevented.    We  may  say, 


22      TRANSPORTATION    COSTS  OF  COMMERCE 

then,  that  over  a  period  of  many  years,  rates  must,  in 
general,  yield  a  fair  return  on  cost.^  In  a  business  re- 
quiring such  tremendous  capital  investment,  the  oscil- 
lations to  one  side  and  the  other  of  a  normal  return  may 
extend,  each,  over  a  considerable  period  of  time. 

Even  after  the  investment  has  been  made,  a  railroad 
will  not  continue  to  operate  indefinitely  if  it  is  beheved 
that  no  return  whatever  can  be  realized.  For  part  of 
the  plant  can,  if  necessary,  be  used  in  alternative  ways. 
The  roadbed  may  have  been  rendered  useless  for  any 
other  purpose.  But  the  terminals,  and  especially,  per- 
haps, the  land  on  which  the  terminal  structures  have 
been  placed,  would  have  value  and  would  yield  a  return, 
if  otherwise  used.  Though  a  railroad  unfortunately 
located  may,  therefore,  be  operated  for  what  would 
otherwise  be  an  inadequate  profit,  it  will  not  intention- 
ally be  permanently  operated  for  a  less  profit  than  parts 
of  its  plant,  such  as  terminal  real  estate,  would  yield  in 
other  uses.2  Obviously,  it  is  not  desirable  that  the  rail- 
road should  be  operated,  if  its  services  are  of  so  Httle 
value  to  the  public,  and  if  the  terminal  real  estate  and 
other  parts  of  the  plant  would  yield  greater  service  in 
other  uses. 


» At  least,  investors  must  expect  this  if  their  capital  is  to  be  risked.  See 
discussion  in  Marshall,  Prhmpks  of  Economics,  6th  ed.,  London  (Macmillan), 
igio,  pp.  372-375  and  420,  421. 

2  If  it  is  objected  that  the  value  of  terminal  real  estate  for  any  use  depends 
largely  on  the  presence  of  the  railroad,  the  answer  may  be  made  that  this  is  not 
true  if  we  suppose  the  railroad  plant  to  be  decreased  by  small  increments  or  if 
we  suppose  the  places  in  question  to  be  served  by  several  railroads.  In  other 
words,  it  is  not  true  for  the  marginal  railroad  or  the  marginal  track  or  the  mar- 
ginal construction  of  transportation  plant  in  general.  Furthermore,  while  it  is  a 
fact  that  the  presence  of  railroads  operates  to  increase  land  values,  it  is  also 
true  that  the  presence  of  other  industries  and  of  large  population  is  a  necessary 
condition  to  high  land  values  and,  therefore,  to  high  value  of  railroad-owned 
real  estate. 


THE  COST  OF  TRANSPORTATION  23 

It  is  not  enough  to  say  that  a  railroad  should  not 
be  constructed  unless  it  will  yield  an  average  profit  on 
its  labor  cost.  It  should  yield,  also,  a  surplus  above 
this  amount,  as  great  as  the  land  space  required  would 
yield  in  the  best  alternative  use.  If  the  railroad  can- 
not yield  such  a  return,  it  is  more  economical  to  use  the 
land  otherwise ;  the  transportation  use  is  not  as  impor- 
tant as  the  other  use ;  the  unwillingness  of  the  com- 
munity to  pay  as  much,  in  transportation  rates,  for  this 
use,  as  they  can  be  induced  to  pay  for  the  other,  is  evi- 
dence that  the  other  is  more  needed  or,  at  least,  more 
desired. 

The  growth  of  a  community  frequently  adds  greatly  to 
the  profits  of  railroads  and  other  land  owners.  The  land 
comes  to  have  more  rental  value  for  nearly  all  purposes. 
Though  this  community  growth  is  partly  due  to  rail- 
roads, it  is  usually  the  result  of  many  causes  of  which 
the  building  of  any  particular  railroad  is  only  one.  It 
is  frequently  asserted,  therefore,  that  this  greater  profit 
of  railroads  is  unearned  and  that  it  should  not  be  en- 
joyed by  the  owners  of  railroad  securities.  Assuming 
this  view  to  be  correct  (and  it  is  unnecessary  for  our 
present  purposes  to  prove  or  disprove  it),  the  conclusion 
does  not  follow  that  rates  should  be  reduced.  As  above 
stated,  a  railroad  docs  not  justify  itself  unless  it  can 
earn  as  much  as  the  land  could  earn  in  some  other  use. 
If  the  rental  value  has  gone  up  for  other  uses  because 
of  community  growth,  presumably  the  amount  which 
the  land  can  earn  if  used  for  a  railroad,  will  be  greater. 
Rates  will  probably  not  be  higher  and  may  even  be 
lower,  but  business  will  be  larger.  To  reduce  rates  ar- 
bitrarily by  law,  in  order  to  deprive  railroads  of  an 
alleged  unearned  increment,  would  serve  no  good  pur- 


24      TRANSPORTATION   COSTS  OF   COMMERCE 

pose.  It  would  be  a  discrimination  against  railroads 
as  compared  to  other  land  owners.  It  would  largely 
prevent  the  use  of  land  for  railroad  building,  even,  per- 
haps, when  railroads  are  much  needed.  It  would  give 
the  benefit  of  the  unearned  increment  to  those  who 
patronize  the  roads  instead  of  to  those  who  own  them, 
or  to  the  different  members  of  the  community  in  pro- 
portion to  the  use  each  makes  of  the  railroads.  It  would 
not  give  the  unearned  increment  to  the  public  as  a  whole, 
to  be  used  for  public  benefit.  If  the  unearned  increment 
belongs  to  the  whole  community,  as  is  frequently  claimed, 
this  community  right  can  be  asserted  with  least  incon- 
sistency and  least  interference  with  an  economical  dis- 
tribution of  labor  to  different  lines,  by  a  general  and 
properly  apportioned  tax  on  land  values. 


Average  Railroad  Rates  as  Afeded  hy  Degree  of  Utiliza- 
tion of  Railroad  Capital 

Since  expenses  for  the  production  of  train  mileage  do 
not  increase  in  proportion  to  traffic,  and  since  general 
expenses  and  fixed  charges  (or  sunk  costs)  taken  together 
do  not  greatly  depend,  within  the  Hmits  of  utilization 
of  plant,  upon  the  amount  of  traffic,  it  follows  that 
average  rates  can  be  made  lower  without  being  made  un- 
profitable, if  utilization  of  plant  is  relatively  complete. 
Where  traffic  is  extremely  heavy,  even  though  there  are 
a  number  of  railroads  to  carry  it,  each  railroad  may  be 
fairly  well  utilized  and  so  able  to  make  low  rates.  Where 
trafi&c  is  very  light,  even  a  single  one-track  railroad  may 
be  utilized  to  so  slight  a  degree  that  its  rates  must  be 
high  to  yield  a  reasonable  profit. 


THE  COST  OF  TRANSPORTATION  25 

We  have  said  that  the  tendency  to  decreasing  propor- 
tionate cost  does  not  apply  to  the  same  extent  after 
existing  plant  is  fully  utilized,  though  it  may  apply  to 
some  extent  if  a  larger  plant  can  give  more  economical 
service  than  a  smaller.  A  double-track  road,  fully 
utilized,  may,  as  has  been  already  pointed  out,^  be  able 
to  carry  goods  more  cheaply  than  a  one-track  road. 
Trains  can  follow  each  other  more  closely  and  with  less 
switching,  each  track  being  used  only  for  the  traffic  in 
one  direction.  Maintenance  costs  will  not  probably  in- 
crease in  proportion  to  the  efficiency  of  the  plant.  Simi- 
larly, large  and  powerful  engines,  and  cars  of  great 
carrying  capacity,  which  it  would  not  pay  to  use  if 
traffic  were  small  and  the  average  train  load  light,  may 
mean  much  cheaper  transportation  if  the  volume  of 
traffic  justifies  their  use. 

§5 

Expenses  mid  Rales  of  Water  Transportation 

Expenses  of  water  transportation  may  be  classified 
in  much  the  same  way  as  expenses  of  rail  transportation. 
First,  there  are  the  expenses  which  pertain  particularly 
to  moving  the  traffic,  and  depend  most  nearly  upon  the 
amount  of  traffic.  This  class  of  expenses  includes  fuel, 
wear  and  strain  on  machinery  and  vessels,  so  far  as  due 
to  use,  and,  in  a  great  degree,  wages  of  seamen.  Even 
these  expenses  do  not  vary  strictly  in  proportion  to 
traffic,  since  they  are  not  twice  as  great  for  a  vessel  fully 
loaded  as  for  one  carrying  only  half  a  cargo.  But  in 
the  case  of  the  tramp  vessel,  sailing  almost  invariably 
only  after  it  has  secured  a  full  or  nearly  full  cargo,  these 

»  §  2  of  this  Chapter  (I  of  Part  III). 


26      TRANSPORTATION   COSTS  OF   COMMERCE 

expenses  probably  vary  in  something  like  the  same 
proportion  as  business.  And  traffic  which  cannot  pay 
enough  to  cover  these  expenses  would  be  refused. 

Second,  we  have  terminal  expenses,  including  the  cost 
of  loading,  unloading,  and  transshipping,  the  charges 
for  pilotage  and  towage,  charges  for  wharf  space,  etc. 
If  a  navigation  company  owns  the  wharves  it  uses,  part 
of  the  expense  for  wharf  repairs  may  properly  be  classed 
with  terminal  costs.  Terminal  expenses  vary  to  a  con- 
siderable degree  as  the  volume  of  traffic  but  not  in 
proportion  to  the  distance  it  is  carried.  All  traffic 
carried  must  therefore  pay  enough  to  cover  the  incident 
terminal  costs,  but  traffic  carried  long  distances  will  not 
necessarily  be  required  to  pay  higher  rates  than  that 
carried  short  distances,  except  as  the  mere  cost  of  carry- 
ing it  is  greater. 

General  expenses,  in  the  case  of  navigation  companies, 
include  some  of  the  expenses  of  managing,  e.g.  the  salaries 
of  ship  officers  so  far  as  these  salaries  may  be  steady 
regardless  of  increases  or  decreases  of  traffic.  In  the 
case  of  companies  operating  a  line  of  ships,  expenses  for 
general  oversight,  freight  soliciting,  etc.,  would  have  to 
be  included.  General  expenses  would  include,  also, 
cleaning  of  the  hulls  of  vessels,  part  of  the  repairs,  part 
of  the  expense  of  wharf  maintenance  where  a  company 
itself  owns  the  wharves  used,  etc.  These  expenses 
would  stop  if  business  were  given  up  and,  therefore,  the 
business  as  a  whole  must  cover  them ;  but  they  do  not 
vary  as  traffic  varies,  cannot  be  definitely  allocated,  and 
do  not  fix  a  minimum  rate  for  any  particular  business. 
If  it  is  necessary  to  get  the  business,  a  rate  may  be  made 
for  certain  special  traffic,^  or  between  certain  special 

1  See,  however,  §  6  of  this  Chapter  (I  of  Part  III). 


THE   COST  OF  TRANSPORTATION  27 

points,^  or  during  a  given  period  of  time  or  season  when 
business  is  not  easy  to  secure,  which  pays  but  little 
towards  the  general  expenses.  It  is  better  to  take 
traffic  which  helps  to  pay  the  general  expenses,  even  if 
it  does  not  pay  what  appears  to  be  its  mathematically 
proportionate  share,  than  to  refuse  this  traffic  and  so 
lose  the  smaller  share  which  it  can  pay.  Only  if  equip- 
ment is  fully  utilized  by  the  better  paying  traffic,  can 
traffic  which  contributes  even  but  a  little  towards  general 
expenses  be  properly  refused.  On  the  other  hand, 
traffic  as  a  whole  must  pay  enough,  in  the  long  run,  to 
cover  general  expenses,  or  it  will  not  be  worth  while  for 
a  navigation  company  to  continue  operating. 

Fixed  charges  include  interest  on  the  original  cost  of 
ships  and  of  terminals,  if  construction  is  with  borrowed 
capital.  In  any  case,  the  original  cost  is  a  sunk  cost. 
It  cannot  be  recovered  (except  so  far  as  the  materials 
used  have  value  as  lumber  or  old  iron,  etc.)  if  the  invest- 
ment of  capital  proves  to  have  been  unwise.  The  indi- 
vidual investor  may  sometimes  recover  it  by  disposing 
of  his  ships  to  some  one  else  for  more  than  they  are 
worth,  but  for  society  as  a  whole,  the  choice  cannot  be 
made  again.  The  fixed  charges  or  sunk  costs  do  not 
vary  with  traffic  and  cannot  be  definitely  allocated. 
They  do  not  fix  a  minimum  rate  for  any  special  traffic. 
Part  of  the  cargo  of  a  regular-line  ship  (which  must  sail 
on  schedule,  whether  loaded  or  not)  may  pay  but  little 
towards  the  fixed  charges  or  even  towards  general  ex- 
penses, and  yet  be  worth  taking  if  traffic  is  light  and  noth- 
ing else  can  be  had  to  make  up  a  full  cargo.^  Even  a 
vessel  carrying  cargoes  in  bulk,  e.g.  a  "  tramp  "  vessel, 

'See  remarks  at  end  of  §  i  in  Chapter  IV  (of  Part  III). 

*  Except  roughly  over  extremely  long  periods.    See  remainder  of  this  section. 


28      TRANSPORTATION   COSTS  OF  COMMERCE 

may  sometimes  carry  freight  during  a  dull  season  or  on 
a  single  trip,  though  this  traffic  does  not  pay  the  usual 
profit,  rather  than  to  refuse  the  traffic  and  get  no 
profit. 

If  the  business  as  a  whole  of  a  navigation  company 
does  not  pay  general  expenses  and  cannot  be  expected 
to,  abandonment  of  ships  is  more  economical  than  con- 
tinued use,  although  in  some  cases  vessels  can,  as  rail- 
roads cannot,  be  taken  into  other  districts  where  their 
use  might  pay.  But  if  the  traffic  pays  all  the  general 
expenses  and  something  besides,  even  if  this  surplus  is 
not  a  fair  interest  on  the  original  investment  (but  is  fair 
interest  on  the  value  of  the  material  for  other  uses), 
continued  operation  is  worth  while.  If  ships  have  been 
mistakenly  built  for  traffic  which  cannot  bear  profitable 
rates,  or  if  they  have  been  built  too  small  or  too  large 
for  the  most  efficient  service,  it  is  nevertheless  better  to 
earn  2  or  2^  per  cent,  than  nothing.  It  is  better  from 
the  viewpoint  of  national  wealth  that  such  equipment 
should  be  used  even  if  its  construction  has  involved  a 
partial  waste  of  labor,  than  that  the  equipment  should 
not  be  used  and  that  the  labor  of  its  construction  should 
be,  therefore,  a  total  waste. 

If,  however,  the  average  rate  chargeable,  multiplied 
by  the  traffic,  cannot  yield  enough  to  pay  fair  interest 
on  investment  in  ships,  new  ships  are  not  likely  to  be 
built  as  rapidly  as  commerce  increases,  or  even,  perhaps, 
fast  enough  to  replace  the  old  as  they  become  unsea- 
worthy.  As  long  as  existing  ships  can  be  kept  in  service 
by  not  too  extensive  repairing,  they  will  be  used.  But 
anything  in  the  nature  of  renewed  investment  will  not 
occur.  It  would  involve  a  diverting  of  labor  into  a 
relatively  unprofitable  line,  if  it  did  occur.     So,  in  the 


THE   COST  OF  TRANSPORTATION  29 

long  run,  although  not  necessarily  over  a  period  even  of 
several  years,  rates  charged  must  cover  interest  on 
investment,  else  supply  of  service  will  not  equal  de- 
mand. 

§6 

Comparative  Importance  of  General  Expenses  and  Fixed 
Charges  on  Railroads,  on  Natural  Waterways,  and  on 
Canals 

It  should  be  particularly  emphasized  that  transpor- 
tation on  the  ocean  and  sometimes  on  lakes  and  rivers 
differs  from  railway  transportation  in  the  relative  un- 
importance of  general  and  fixed  charges.  There  are  no 
appreciable  general  expenses  in  ocean  navigation  for 
maintenance  of  way,^  and  there  are  no  fijced  charges  (or 
sunk  costs)  resulting  from  the  necessity  of  constructing 
a  way  or  roadbed  and  tracks  for  the  passage  of  cars. 
Both  general  expenses  and  fixed  charges  appear  to  be 
of  less  relative  importance  in  the  case  of  ocean  and 
sometimes  lake  and  river  transportation.  Water  trans- 
portation seems,  therefore,  not  to  be  so  markedly  a 
business  of  decreasing  proportionate  expense  or  increas- 
ing return.^ 

Furthermore,  in  the  case  of  securing  rail  transportation 
between  two  distant  points,  the  least  possible  invest- 
ment is  a  roadbed  and  a  single  track,  costing,  perhaps, 
millions  of  dollars ;  though  the  traffic  available  may  not 
at  all  fully  utilize  such  a  plant.  It  is  very  apt  to  be  the 
case,  therefore,  that  if  there  is  enough  of  paying  traffic 

*  Except  as  lighthouse  service,  etc.,  may  be  so  regarded ;  and  this  is  an  ex- 
pense usually  borne  by  government. 

*  Cf.  Report  of  the  Commissioner  of  Corporations  on  Transportation  by 
Water  in  the  United  Stales,  igog,  Part  I,  pp.  13,  14. 


30      TR.\NSPORTATION   COSTS  OF   COMMERCE 

to  warrant  building  the  road,  it  will  be  worth  while  to 
take  additional  traffic  at  lower  rates,  when  such  addi- 
tional traffic  will  pay  anything  whatever,  however  little, 
towards  net  profits.  In  the  case  of  transportation  on  a 
natural  waterway,  however,  nothing  but  vessels  and 
wharves  have  to  be  constructed.  If  possible  traffic  is 
small,  fewer  vessels  will  need  to  be  constructed  for  it,  or 
the  vessels  constructed  may  be  made  of  smaller  size.  In 
a  sense,  a  part  of  a  vessel  can  be  constructed  for  the 
traffic,  since  a  vessel  to  be  used  mainly  for  other  traffic 
can  make  an  occasional  trip  between  the  two  points 
in  question.  Thus,  in  the  case  of  transportation  on 
natural  waterways,  excess  facihties  on  which  to  pay 
interest  are,  perhaps,  less  frequently  constructed,  and 
there  is  probably  less  occasion  to  seek  additional  traffic 
at  lower  than  average  rates,  in  order  to  utiUze  such 
facihties.  So  far,  of  course,  as  larger  vessels  are  a  dis- 
tinctly more  economical  means  of  carrying  freight  than 
smaller  ones,  there  is  a  motive  for  building  ships  large, 
even  if,  fully  to  utilize  them,  some  freight  must  be  taken 
at  sHghtly  less  than  average  rates. 

Water  transportation  expenses  seem  to  be  more 
analogous  to  railroad  expenses,  when  vessels  navigate  a 
canal  or  other  waterway  on  the  improvement  of  which 
much  money  has  been  spent.  The  annual  cost  of 
maintaining  the  canal  or  other  waterway,  e.g.  dredging 
or  repairing,  or  both,  may  be  regarded  as  very  largely  a 
general  expense.  The  amount  spent  in  constructing  or 
improving  the  waterway  is  a  sunk  cost,  and,  if  the 
money  was  borrowed,  interest  on  it  should  be  regarded 
as  a  fijxed  charge.  As  a  matter  of  practice,  such  improve- 
ments are  commonly  made,  in  this  country,  by  govern- 
ment, and  the  interest  is  apt  to  be  regarded,  not  as  a 


THE   COST  OF  TRANSPORTATION  31 

fixed  charge  on  the  traffic,  which  ought  to  bear  it,  but  as 
a  fixed  charge  on  tax-payers. 

Taking  the  case  of  a  canal,  the  logical  conclusion, 
according  to  the  principles  which  have  been  set  forth 
in  this  chapter,  regarding  railroads,  is,  that  no  goods 
should  pass  through  without  paying  whatever  extra 
costs  their  carrying  occasions,  including  cost  of  moving, 
wear  occasioned  on  the  canal,  etc. ;  that  traffic  which 
can  pay  that,  and  anything  besides  towards  general 
expenses,  should  be  accepted  rather  than  rejected,  if 
plant  is  not  fully  utilized ;  that  the  traffic  as  a  whole 
must  pay  all  general  expenses  of  operating  the  canal  and 
keeping  it  in  repair,  else  permanent  operation  will  not 
pay ;  that  it  may  be  better  to  operate  for  a  small  profit, 
once  the  canal  has  been  constructed,  than  to  refuse  to 
operate  because  profits  are  not  large ;  that  the  con- 
struction of  a  canal  or  the  improvement  of  any  water- 
way should  not  be  undertaken  unless  a  profit  approxi- 
mating that  in  other  investments  is  reasonably  to  be 
expected,  and  that  the  construction  or  improvement  of 
a  waterway  when  such  returns  cannot  be  had,  involves 
a  diversion  of  labor  from  a  more  profitable  into  a  less 
profitable  line.  It  may  be  added  that  a  canal,  like  a 
railroad,  should  not  be  constructed  if  some  other  use  of 
the  necessary  land  space  would  yield  a  larger  return. 

§7 

The  Proper  Basis  of  Wharf  Charges 

Wharves  are  often  owned  by  other  interests  than  those 
owning  the  vessels  using  the  wharves,  not  infrequently 
by  states  or  municipalities.  It  may  be  worth  while, 
therefore,  to  give  brief  separate  attention  to  the  sub- 


32      TRANSPORTATION   COSTS   OF   COMMERCE 

ject  of  wharf  charges.  The  charges  for  use  of  a  wharf 
may  properly  be  high  enough,  taken  as  a  whole,  to  pay 
the  average  return  on  necessary  investment  for  construc- 
tion. Also,  the  space  required,  if  it  has  value  for  other 
purposes  than  as  wharf  space  alone,  e.g.  for  the  loca- 
tion of  a  manufacturing  plant  on  the  water's  edge,  may 
rightly  be  made  to  yield  as  much  when  it  is  used  only 
as  a  wharf.  Otherwise,  the  space  is  devoted  to  one  use, 
and  some  other  use,  able  to  pay  more  and,  therefore, 
presumably  more  worth  while  to  the  community,  is 
excluded. 

Or  again,  if,  about  any  given  harbor,  the  space  which 
can  satisfactorily  be  utiUzed  for  wharves  is  limited,  the 
charge  for  use  of  wharves  may,  not  unjustifiably,  be 
high  enough  to  keep  the  demand  for  wharf  space  down 
to  the  available  supply,  or  to  keep  the  demand  for  the 
more  desirable  wharf  space  down  to  the  available  supply. 
Such  a  charge  cannot  operate  to  decrease  commerce, 
for  it  allows  all  the  commerce  for  which  there  are  facili- 
ties, and  no  more  commerce  could  pass  through  a  given 
port  if  there  were  no  charge  whatever.  Neither  will 
such  a  charge  operate  to  raise  prices  to  consumers,  for 
it  will  not  Umit  the  supply  of  goods  going  through  the 
given  port  or  over  the  desirably  located  wharves,  any 
more  than  such  supply  would  be  Umited  anyhow  by  the 
lack  of  space.  The  limitation  of  the  supply  of  goods  is 
all  that  can  raise  their  prices,  and  the  supply  of  goods 
is  not  affected.  In  any  case,  the  remainder  of  the  goods, 
beyond  what  the  given  port  or  the  given  desirable 
wharves  could  provide  accommodation  for,  would  have 
to  go  inland  by  way  of  other  ports  or  other  wharves, 
and  the  competition  of  these  will  determine  supplies  and 
prices.     If  the  superior  port  or  wharves  did  not  charge 


THE   COST  OF  TRANSPORTATION  33 

for  its  or  their  superiority,  the  fortunate  users  (shipowners 
or  sellers  of  goods)  would  simply  get  a  surplus  profit 
over  what  their  rivals  could  get,  analogous  to  land  rent. 

The  proper  charge,  then,  is  a  fair  rent  for  the  space 
used,  based  upon  its  desirabiUty  and  its  scarcity,  and  a 
fair  interest  for  any  necessary  cost  of  construction. 
This  is  what  the  charge  would  tend  to  be  under  com- 
petitive conditions.  No  one  would  be  likely  to  charge 
more  for  his  wharf  space,  else  it  would  not  be  used.  No 
one  would  be  likely  to  charge  less,  for  the  demand  would 
make  it  possible  for  him  to  get  that  amount  ^  whether 
others  chose  to  do  so  or  not.  What  would  be  a  normal 
competitive  charge  under  conditions  of  private  owner- 
ship is  what  ought  to  be  charged  by  state  or  municipahty 
if  it  owns  the  wharves. 

The  statement  that  a  proper  charge  includes  economic 
rent  for  space  required  does  not  necessarily  mean  that 
this  rent  should  go  ultimately  into  the  pockets  of  private 
persons.  Space  aflforded  is  not  service  rendered  or  effort 
sustained  by  an  individual.  The  rent  for  it  may  plausi- 
bly be  regarded  as  an  unearned  income  and  as  properly 
belonging  to  the  community.  But,  in  any  case,  the  rent 
of  wharf  area  constitutes  in  this  regard  no  separate 
problem.  It  should  be  judged  along  with  the  problem 
of  land  rent  in  general. 

§8 

Economic  Objections  to  Monopolistic  Transportation 
Rates 

Up  to  this  point  we  have  been  concerned  chiefly  with 
the  question  of  what  expenses  transportation  rates  ought 

>  See  Part  I,  Chapter  I,  §  2. 
PART  m  —  D 


34      TRANSPORTATION   COSTS  OF   COMMERCE 

to  cover  and  what  returns  on  investment  they  ought  to 
yield.  A  few  words  should  be  added  regarding  what 
returns  they  ought  not  to  yield.  They  ought  not  to 
yield  monopoly  profits.  High  rates  yielding  surplus  or 
monopoly  profits  are  distinctly  adverse  to  the  general 
interest.  Not  only  do  they  involve  an  unfortunate  dis- 
tribution of  the  products  of  industry,  but  also  they  in- 
volve a  diminution  in  the  total  amount  of  these  products. 
For  a  monopoUstic  transportation  company  will  charge 
those  rates  on  each  kind  of  traffic  which  yield  the  largest 
profit,  even  though  a  lower  average  of  rates  would  be 
profitable,  would  more  fully  utilize  the  transportation 
plant,  and  would  widen  the  field  of  commerce.  Monop- 
oly rates  prevent  transportation  which  would  be  worth 
to  the  community  the  labor  cost  required,  which  would 
be  worth  fair  rates,  but  which  cannot  take  place  when 
excessive  rates  are  charged.^  Monopoly  rates,  like 
tariffs,  interfere  with  commerce  between  communities, 
with  commerce  which  would  be  profitable,  if  not  thus 
prevented,  to  both  or  all  the  communities  engaged  in  it. 

§9 

Summary 

The  discussion  of  expenses  of  water  transportation  has 
already  given  us,  because  of  the  analogy  between  the 
two,  something  of  a  review  of  the  principles  regarding 
railroad  expenses.  A  brief  summary  of  the  conclusions 
of  this  chapter  may,  therefore,  suffice.  For  both  rail 
and  water  transportation,  we  made  a  fourfold  classifi- 

1  It  is  impossible  for  the  monopolistic  company  to  avoid  this  result  by  making 
low  rates  on  such  particular  parts  of  its  traffic  only  as  are  for  the  use  of  hesitating 
consumers,  since  nobody  knows  who  these  consumers  are  or  which  special  tons 
or  bushels  will  eventually  go  to  them. 


THE   COST  OF  TRANSPORTATION  35 

cation  of  expenses.  First  there  are  the  expenses  per- 
taining most  particularly  to  the  moving  of  goods. 
Second  there  arc  tenninal  expenses,  affected  by  the 
volume  of  traffic  but  not  by  the  distance  carried.  Third, 
there  are  general  expenses  which  will  cease  if  the  plant 
or  capital  equipment  is  abandoned  but  which  change 
only  a  little  with  considerable  increases  or  decreases  of 
business.  Fourth,  there  are  fixed  charges  or  sunk  costs, 
which,  once  the  investment  has  been  made,  do  not  vary 
with  traffic.  Each  item  of  traffic  must  pay  a  rate  high 
enough  to  cover  the  additional  expenditure  which  it 
occasions.  To  carry  traffic  which  carmot  pay  this  in- 
volves economic  waste.  Traffic  as  a  whole  must  cover 
general  expenses,  else  continuance  of  transportation 
service  becomes  unprofitable.  Construction  of  trans- 
portation faciUties  should  not  be  undertaken  unless  there 
is  reasonable  probability  that  traffic  as  a  whole  can  pay 
a  fair  return  on  investment.  Yet  if  investment  has  been 
mistakenly  made,  it  may  be  better  to  operate  for  small 
return  than  to  abandon  the  capital  so  invested.  Total 
charges  should  be  high  enough  to  pay  at  least  as  large 
returns  beyond  interest  on  construction  cost  as  the 
space  used  would  yield  if  devoted  to  the  best  alternative 
purpose.  Up  to  the  limit  of  complete  utilization  of 
plant,  expenses  of  transportation  increase  less  rapidly 
than  business.  Beyond  that  limit,  they  may  increase 
less  rapidly  than  business  if  the  larger  plant  is  more 
efficient  than  the  smaller.  But  additions  to  plant  may 
mean,  for  a  time,  incomplete  utilization  and  so  greater 
proportionate  expense.  Water  transportation  on  free 
waterways  appears  to  be  less  subject  to  the  tendency 
towards  decreasing  proportionate  expense  than  rail 
transportation,    because    there    are    no    corresponding 


36      TR.\NSPORTATION   COSTS  OF  COMMERCE 

expenses  for  construction  and  maintenance  of  way. 
Water  transportation  on  canals  is  in  this  regard  more 
analogous  to  rail  transportation.  Wharf  charges  should 
cover  interest  on  necessary  construction  cost  plus  a 
normal  land  rent  for  the  space  used.  Finally,  as  to  both 
rail  and  water  transportation,  the  conclusion  is  that 
monopoly  rates  are  uneconomical  as  well  as  unfair,  since 
they  tend,  like  tariff  restrictions,  to  interfere  with  com- 
merce which  is  normally  profitable  and  which  ought  to 
be  allowed  to  take  place. 


CHAPTER  II 

The  Competition  of  Transportation  Companies 

§1 
Competition  of  Routes 

Competition  of  transportation  lines  may  be  classified 
as  of  four  kinds :  competition  of  different  companies 
over  the  same  route,  competition  of  routes,  competition 
of  directions,  and  competition  of  locations.  Let  us 
consider  these  four  kinds  of  competition  in  order.  Com- 
petition of  different  lines  over  the  same  route  applies 
particularly  to  transportation  on  free  waterways,  for 
example,  on  the  ocean.  In  such  transportation,  the  way 
or  route  is  not  the  possession  of  any  one  company  but 
may  be  used  by  all.  The  different  companies  operating 
over  a  given  route  may  be  in  competition  with  each  other. 

Competition  of  routes  may  exist  between  navigation 
companies  or  railroad  companies  or  both.  By  com- 
petition of  routes  is  meant  competition  between  two 
or  more  different  routes  or  Unes  of  transportation,  either 
or  any  of  which  can  carry  goods  between  two  given 
points.  Such  a  competition,  for  example,  is  that  which 
obtains  between  Chicago  and  New  York.  These  cities 
are  joined  by  a  number  of  transportation  lines.  Goods 
moving  between  these  two  points  have  a  choice  of 
routes;  and  the  tendency  is  for  the  goods  to  be  sent, 
in  each  case,  by  that  route  which  is,  for  the  shipper, 
most  economical,  considering  rates,  speed,  liability  to 

37 


38      TRANSPORTATION   COSTS   OF   COMMERCE 

injury,  etc.  Some  of  the  possible  routes  are :  that  by 
the  Great  Lakes,  the  St.  Lawrence  River,  and  the  Atlan- 
tic Ocean,  that  by  the  Lake  Shore  and  Michigan  South- 
ern and  the  New  York  Central  railways,  that  by  the 
Pennsylvania  Unes,  and  others.  The  transportation  of 
wheat,  corn,  and  other  farm  products  from  American 
centers  of  production  to  Europe,  e.g.  between  Chicago, 
St.  Louis,  etc.,  in  the  United  States,  and  Liverpool  in 
England,  is  another  example.  These  products  can 
frequently  be  taken  via  the  Great  Lakes,  via  any  of 
the  trunk  Hnes,  or  via  lines  operating  in  southern  terri- 
tory to  Norfolk,  Galveston,  or  New  Orleans,  and  thence 
to  Liverpool.  Still  another  example  of  competition  of 
routes  is  the  traffic  from  AustraUa  and  China  to  New 
York,  which  may  be  carried  either  by  ship  westward 
via  the  Suez  Canal  or  by  ship  eastward  to  San  Francisco 
and  thence  by  rail  to  New  York  (soon  also,  doubtless, 
the  Panama  Canal  will  be  a  permanently  available 
avenue  of  transport).  These  two  different  routes  are 
in  vigorous  competition  for  the  traffic.^  We  have 
substantially  the  same  kind  of  competition,  i.e.  of 
routes,  when  goods  are  stored  with  wholesalers  or 
jobbers  at  intermediate  points,  and,  likewise,  when 
they  are  changed  in  form,  say  from  raw  materials  to 
finished  products,  at  intermediate  points,  provided 
source  and  destination  of  traffic  by  the  various  routes 
are  about  the  same.  The  different  transportation  com- 
panies compete,  each  to  carry  goods  from  the  common 
source  to  manufacturers  or  jobbers  on  its  own  line 
and  thence  to  the  common  market.  Each  trans- 
portation company  desires  that  the  conditions  shall 
be  as  favorable  for  such  stoppage  and  reshipment  on 

»  McPherson,  Railroad  Freight  Rates,  New  York  (Holt),  1909,  p.  146. 


COMPETITION  OF   COMPANIES  39 

its  line  as  on  rival  lines.  In  order,  however,  that  the 
competition  of  routes  between  two  or  more  rail  or 
water  lines  may  be  availed  of,  it  is  not  necessary  that 
the  goods  to  be  shipped  should  be  produced  at  a  point 
where  several  such  lines  meet.  It  is  only  necessary 
that  the  goods  should  be  produced  within  reasonable 
wagon-  or  truck-hauling  distance  from  such  routes. 
Thus,  within  the  wheat-  and  corn-producing  regions  of 
the  United  States,  numbers  of  farms  are  located  near 
enough  to  two  or  more  railroad  Unes  to  exercise  a  real 
choice  among  these  Unes. 

Competition  of  routes  may  mean  and  frequently 
does  mean  that  goods  are  taken  to  their  destination 
by  a  very  roundabout  way.  Sometimes  the  distance 
freight  is  actually  carried  in  being  taken  from  one  point 
to  another  is  from  50  to  100  per  cent,  greater  than  the 
shortest  possible  distance.^  In  the  Savannah  fertilizer 
case,  for  example,  it  was  shown  that  goods  were  carried 
from  Charleston,  S.C,  to  Valdosta,  Ga.,  by  connecting 
lines  of  railroad,  a  distance  of  413  miles,  when  they  might 
have  been  carried  by  a  more  direct  Hne  to  Valdosta,  a 
distance  of  only  275  miles.^ 

Other  things  equal,  such  roundabout  transportation 
is  uneconomical.'  It  costs  more  to  carr^'  goods  by  a 
long  than  by  a  short  route  between  two  given  points. 
Assuming  the  same  rate  on  either  line,  the  long  line 
presumably  has  a  less  surplus  as  profit  than  the  short 
line  would  have.  Diversion  of  freight  to  the  long  line, 
therefore,  probably  means  that  the  short  line  loses  a 

*  W.  Z.  Ripley,  Railroads,  Rates  and  Regulation,  New  York  (Longmans, 
Green  &  Co.),  1912,  pp.  269,  270. 

'  Interstate  Commerce  Reports,  Vol.  VII,  p.  476  (458-480). 

•  Cf.  Ripley,  Railroads,  Rates  and  Regulation,  Chapter  VIII,  where  this  and 
other  transportation  wastes  are  criticized. 


40    TRANSPORTATION   COSTS  OF  COMMERCE. 

larger  profit  than  the  long  Hne  gains.  Looked  at  from 
the  point  of  view^of  community  economy,  it  means  that 
a  greater  amount  of  labor  is  used  to  secure  a  result 
which  a  smaller  amount  of  labor  would  equally  well 
secure.  This  greater  amount  of  labor  is  less  profitably 
employed  than  it  might  be,  with  resulting  loss  in  the 
total  of  the  community's  wealth.  As  in  the  case  of  the 
protective  tariff,  labor  is  employed  where  it  does  not 
yield  the  maximum  return  to  the  community.  It  is 
not,  of  course,  always  the  shortest  hne  in  miles  which 
is  most  economical.  The  shortest  hne  may  be  one 
which  has  relatively  steep  grades  and  so  requires  more 
labor  and  fuel  than  a  longer  one.  As  between  two 
lines  of  equal  length,  the  choice  should  ordinarily  fall 
upon  the  more  level;  while  as  between  two  lines  of 
equal  grades,  the  choice  should  ordinarily  fall  upon  the 
shorter.  For  the  same  reasons,  it  is  desirable,  other 
things  equal,  that  a  place  should  have  goods  brought 
to  it  from  the  nearest  source  of  production  and  that 
centers  of  production  should  send  their  goods  to  the 
nearest  markets.  This,  of  course,  may  be  very  un- 
desirable when  other  things  are  not  equal.  It  may  be 
better  that  goods  be  brought  from  a  far  cheap  source 
than  from  a  near-by  dear  one.  But  where  production 
costs  are  equal,  transportation  costs  should  be  the  least 
possible. 

§2 

Circumstances  which  May  Make  Carriage  of  Goods  by  a 
Longer  Route  More  Economical  than  their  Carriage  by 
a  Shorter  Route 

There  arc,  however,  three  possible  situations,  in  any 
one  of  which  it  may  be  desirable  that  goods  should  be 


COMPETITION  OF  COMPANIES  41 

carried  by  a  relatively  long  and  roundabout  route  in- 
stead of  by  a  shorter  and  more  direct  one,  even  though 
grades  are  equal.  To  illustrate  the  first  case  of  this 
sort,  suppose  the  cities  A  and  D  to  be  connected  by  the 
two  railroad  lines  AD  direct  and  A  BCD.     (See  figure  i.) 


A* 


Suppose,  also,  that  the  traffic  between  A  and  D  is  more 
than  the  direct  line  AD  can  properly  care  for.  Then 
it  may  well  be  that  the  surplus  traffic,  beyond  what 
the  line  AD  can  carry,  should  go  by  the  indirect  line 
A  BCD,  rather  than  that  a  new  direct  line  should  be 
built  between  A  and  D  or  that  the  line  AD  should  in- 
crease its  trackage.  For  the  construction  of  a  new 
line  or  more  trackage  involves  an  additional  invest- 
ment of  capital.  The  capital  invested  in  the  round- 
about line  A  BCD  has  been  already  sunk  and  cannot 
be  recovered.  If  the  line  ABCD  yields  any  appreciable 
interest  returns,  it  will  probably  be  worth  while  to 
operate  it,  even  though  these  returns  are  small.  From 
the  point  of  view  of  greatest  national  wealth,  it  is  de- 
sirable that  such  a  plant  should  be  operated,  even  though 
it  would  not  be  desirable,  could  the  choice  be  made  again, 
to  construct  the  plant. 

On  the  other  hand,  the  construction  of  a  new  Unc  or 


42    TRANSPORTATION   COSTS  OF  COMMERCE 

new  tracks  should  not  be  undertaken  unless  rates  can 
be  charged  which  will  pay  about  the  average  return  on 
investment.  The  old  roundabout  line  may  be  able  to 
make  profit  enough  to  justify  its  continued  operation 
for  a  great  many  years,  on  rates  lower  than  would 
justify  the  construction  of  a  new  line,  even  if  a  more 
direct  one.  The  construction  of  such  a  new  line,  under 
these  circumstances,  would  involve  economic  waste. 
Exactly  the  same  conclusion  may  be  reached  if  we 
assume  that  there  is  no  direct  line  but  only  the  round- 
about line  between  A  and  D  and  that  the  roundabout 
line  is  able  to  carry  the  traffic  between  these  two  points. 
To  the  question  whether  a  direct  line  ought,  under 
such  circumstances,  to  be  constructed,  it  is  not  unlikely 
that  a  correct  answer  would  be  a  negative. 

To  illustrate  the  second  case  where  carriage  of  goods 
by  a  more  roundabout  Hne  may  be  desirable,  suppose 
(see  figure  i)  that  there  is  a  great  deal  of  possible  traffic 
between  A  and  D,  but  that  no  railroad  connecting 
those  points  has  yet  been  built.  The  question  is, 
whether  a  direct  or  an  indirect  line  will  be  the  more 
profitable.  Other  things  equal,  the  direct  route  would 
be  preferred.  But  let  us  suppose  that  B  and  C  are 
thriving  towns,  and  that  the  traffic  to  and  from  each 
can  be  greatly  developed,  while  on  a  direct  line  from 
A  to  D,  no  other  towns  are  located.  On  this  supposi- 
tion, a  direct  line,  if  constructed,  must  be  able  to  earn 
enough  on  the  through  traffic  between  A  and  D,  to  pay 
not  only  production-of-train-mileage  expenses  and  ter- 
minal expenses,  but  also  all  of  its  general  expenses  and 
profits.  To  do  this  and  yield  profits  worth  building 
for,  it  may  have  to  charge  fairly  high  rates.  If  a  round- 
about road  is  built,  through  B  and  C,  it  will  have  the 


COMPETITION  OF   COMPANIES  43 

local  traffic  between  A  and  B,  between  B  and  C,  and 
between  C  and  D,  as  well  as  the  through  traffic  between 
A  and  D.  The  local  traffic  will  presumably  help  to 
pay  general  expenses  and  interest  or  profits  on  the 
investment.  The  local  traffic  may,  in  fact,  pay  enough 
to  cover  all  the  general  expenses  and  almost  enough  to 
justify,  even  with  no  other  sources  of  revenue  in  view, 
the  construction  of  the  road.  If  the  road  is  built, 
rates  can  be  made  on  the  through  traffic  between  A 
and  D,  which  yield  very  little  more  than  is  required  to 
cover  additional  production-of-train-mileage  costs  and 
terminal  costs ;  yet  this  Uttle  more  will  make  the  road 
a  paying  proposition.  Even  though  freight  from  A 
to  D  or  vice  versa  would  have  to  be  carried  a  longer 
distance  on  this  road,  it  may  be  possible  to  carry  it  for 
lower  rates  than  would  pay  all  expenses,  including 
general  expenses,  and  including  also  a  fair  profit,  on  a 
more  direct  road.  Yet  without  the  through  traffic 
between  A  and  D,  the  line  A  BCD  might  not  be  able  to 
make  an  average  profit,  or  it  might  be  able  to  make 
such  a  profit  only  by  charging  higher  rates  on  its  local, 
short-distance  business.  If,  then,  a  more  indirect  line 
can  carry  goods  more  cheaply  between  A  and  D  than  a 
direct  one,  while  making  no  less  a  per  cent,  or  a  greater 
per  cent,  profit,  and  while,  perhaps,  being  able  to  make 
lower  rates  on  its  intermediate  traffic  than  would  other- 
wise be  necessary,  the  former  is  the  more  economical 
route  to  select.^     If  the  indirect  route  is  chosen,  the 

^  If,  however,  both  a  direct  and  a  roundabout  line  already  exist  between  A  and 
D  and  it  is  merely  a  question  of  constructing  a  new  line  or  additional  trackage, 
because  of  insufficiency  of  the  existing  plants,  then  whether  the  direct  or  the 
indirect  route  would  be  economically  preferable  will  depend  upon  the  relative 
amounts  of  intermediate  and  through  traffic.  If  the  existing  roundabout  road 
can  handle  all  the  intermediate  traffic,  i.e.  the  traffic  from  .1  to  B,  from  B  to  C, 


44    TRANSPORTATION  COSTS  OF  COMMERCE 

additional  labor  necessary  to  carry  the  longer  distance 
traffic  is  less  than  if  a  direct  road  is  constructed  for  the 
longer  distance  traffic  alone.  The  same  principle  may 
apply  if  the  more  direct  line  can  hope  to  secure  some 
intermediate  traffic,  but  considerably  less  than  the 
other.  The  same  principle  may  apply,  also,  if  the 
direct  railroad,  AD,  though  able  to  carry  all  the  local 
or  intermediate  traffic  available  along  its  Une,  is  never- 
theless inadequate,  without  the  construction  of  one  or 
more  additional  tracks,  to  carry,  besides,  all  the  traffic 
seeking  to  go  the  entire  distance  from  A  to  D  and  from 
D  to  A.  In  such  a  case,  the  additional  track  or  tracks 
on  this  more  direct  route,  if  constructed,  would  be 
solely  for  the  sake  of  the  longer  distance  traffic,  and 
to  lay  them  would  be  uneconomical  unless  the  longer 
distance  traffic  would  alone  yield  a  reasonable  profit 
on  the  additional  capital  investment  required.  Sup- 
posing that  a  roundabout  line,  through  B  and  C,  had 
not  previously  been  built,  and  that,  if  constructed, 
such  a  line  could  be  largely  supported  by  intermediate 
traffic,  while  yet  being  able  to  carry  some  of  the  longer 
distance  traffic  also,  the  roundabout  line  might  be  a 
more  economical  and  more  profitable  investment  of 
capital  than  additional  trackage  along  the  direct  line. 

,  The  third  case  to  be  here  considered  is  a  case  where 
the  lines  A  BCD  and  AD  (see  again  figure  i)  have  both 

from  CtoA,  etc.,  and  the  inadequacy  of  facilities  is  due  solely  to  the  excess  of  the 
A  to  D  and  D  to  A  traffic  over  what  the  direct  road  can  carry,  additional  con- 
struction along  the  more  direct  route  would  almost  certainly  be  the  more  eco- 
nomical investment  of  capital.  Rather  than  lay  additional  tracks,  the  round- 
about line  should,  perhaps,  under  such  circumstances,  resign  all  through  traffic 
and  confine  itself  to  intermediate  traffic.  But  if  additional  trackage  must  be 
constructed  by  the  roundabout  line  for  the  intermediate  traffic,  and  if  such  addi- 
tional trackage  will  also  serve  for  the  carriage  of  some  of  the  through  traffic,  the 
roundabout  line  may  be  economically  justified  in  carrying  both. 


COMPETITION  OF   COMPANIES  45 

been  built,  but  where  the  traffic  between  A  and  D  is 
not  more  than  can  be  taken  care  of  by  one  of  the  roads 
alone.  Not  only  is  there  no  need  for  new  construction, 
but  already  existing  facilities  are  in  excess  of  business. 
Unless  more  traffic  is  to  be  hoped  for  in  future,  it  will 
be  the  truest  economy  to  abandon  one  of  the  roads. 
Otherwise  the  community  must  be  burdened  with  two 
sets  of  general  expenses  and  must  in  so  far  lose  the 
economy  that  comes  from  complete  utilization  of  a 
transportation  plant.^  If  other  things  are  equal,  the 
conclusion  will  be  that  the  more  roundabout  road  should 
be  the  one  to  be  abandoned.  But,  as  in  the  second 
case,  other  things  may  be  unequal.  The  roundabout 
road  may  be  able  to  rely  upon  intermediate  traffic 
which  the  more  direct  road  cannot  hope  to  secure. 
In  that  case,  the  direct  road  AD  cannot  afford  long  to 
operate  unless  the  through  traffic  between  A  and  D 
can  bear  rates  high  enough  to  cover  most  or  all  of  the 
general  expenses  of  the  road.  But  the  road  ABCD 
has,  by  hypothesis,  intermediate  traffic  to  and  from 
B  and  C,  and  this  intermediate  traffic  may  possibly  be 
considerable  enough  to  pay  all  the  general  expenses 
of  the  road  and  something  towards  profits.  It  may  be 
worth  while  to  operate  the  road  ABCD  even  without 
any  of  the  through  traffic  between  A  and  D,  or  with 
rates  on  this  through  traffic  barely  above  the  additional 
production-of-train-mileage  costs  and  terminal  costs 
necessary  to  move  it.  The  roundabout  road  may 
therefore  be  able  to  make  lower  rates  on  through 
traffic  between  A  and  D   than   the  direct  road  could 

'This  saving  has  been  aheady  in  part  lost,  when  the  unnecessary  line  has 
been  constructed,  since  capital  which  might  have  earned  a  fair  return  has  been 
put  where  it  cannot  do  so. 


46    TRANSPORTATION   COSTS  OF  COMMERCE 

possibly  afford  to  make,  even  though  the  former  must 
carry  the  goods  longer  distances;  and  may  yet  be  a 
more  profitable  investment  for  its  owners  than  the 
latter  could  hope  to  be  without  charging  higher  rates. 
It  may  sometimes,  therefore,  be  truer  economy  to 
abandon  the  direct  than  to  abandon  the  roundabout 
line  between  two  given  points. 

An  illustration  of  a  movement  of  traffic  in  part  by 
relatively  indirect  routes  is  furnished  by  the  import 
and  export  trade  of  the  United  States.  Goods  are 
carried  to  Chicago  and  other  middle  western  cities  from 
Europe,  and  from  the  great  grain-raising  sections  of 
the  United  States  to  Europe,  by  various  transportation 
routes,  and  not  always  by  the  shortest.  All  the  im- 
portant ports  and  the  railroads  and  steamship  Hnes 
serving  these  different  ports  are  in  competition  for  this 
traffic.  Wheat  may  be  carried  due  south  to  New  Or- 
leans, or  southeast  to  Galveston,  and  thence  to  Europe, 
instead  of  going  east  through  Baltimore,  Boston,  or 
New  York.  If  a  railroad  from  the  American  wheat 
and  corn  regions  to  Norfolk,  Newport  News,  Galveston, 
or  New  Orleans  is  useful  for  domestic  commerce,  and 
can  add  anything  to  its  profits  by  engaging  at  lower 
rates  in  export  and  likewise  import  trade,  it  may  be  as 
well  or  better  that  such  a  railroad  should  engage  in 
this  trade,  as  that  the  New  York  Central  and  the  Penn- 
sylvania systems  should  enlarge  their  plants  so  as  to 
do  more  of  export  and  import  business.  The  different 
ports  and  railroads  concerned  in  this  business  have  on 
many  occasions  engaged  in  contests  to  secure,  each,  a 
larger  share  of  the  trade.  These  contests  can  only  be 
satisfactorily  settled  by  such  an  agreed  relation  of  rates 
as  will  secure  to  each  road  a  quota  of  the  business. 


COMPETITION  OF   COMPANIES  47 

The  Interstate  Commerce  Commission  itself,  when  en- 
deavoring to  settle  such  a  contest,  has  been  able  to 
find  no  better  basis  than  this.^ 

The  conclusions  we  have  reached,  should,  it  is  be- 
lieved, have  some  weight  against  any  proposal  to  prohibit 
absolutely  the  competition  of  roundabout  lines.  We 
have  seen  that  there  are  possible  cases  where  a  round- 
about Hne  may  more  profitably  be  built  for  the  traffic 
between  two  points  than  a  direct  one.  Yet  if  the 
builders  know  in  advance  that  they  will  not  be  allowed 
to  compete  against  a  direct  one,  should  the  latter  be 
constructed,  they  will  be  less  apt  to  build  the  round- 
about line.  Undoubtedly  there  are  wastes  of  competi- 
tion in  the  form  of  uneconomical  carriage  of  goods  over 
unduly  long  routes  to  destination,  and  some  legal  Hmi- 
tation  on  these  wastes  may  be  desirable.  Yet  on  the 
other  hand,  as  we  have  seen,  it  is  not  necessarily  always 
the  shortest  line  which  is  really  the  most  economical  for 
the  purpose.  Furthermore,  the  stimulus  of  competition 
between  rival  routes  is  not  altogether  without  beneficial 
effects  in  hastening  improvement,  increasing  eflSiciency, 
and  keeping  down  average  rates.  The  Interstate  Com- 
merce Law  of  the  United  States  penalizes  the  competi- 
tion of  roundabout  lines  by  forbidding  rates  on  inter- 
mediate traffic,  e.g.  from  yl  to  C  in  our  figure,  higher 
than  rates  on  longer  distance  traffic  over  the  same  line 
in  the  same  direction,  the  shorter  haul  being  included 
in  the  longer;  though  the  rigor  of  this  section  (4)  of 
the  law  is  lessened  by  the  power  of  the  Interstate  Com- 
merce Commission  to  set  it  aside  on  appUcation  of  the 
common  carrier  concerned,  in  cases  where  such  a  ruling 

>  See  Interstate  Commerce  Reports,  Vol.  XI,  pp.  13-81,  particularly  pp. 
62,  63. 


48    TRANSPORTATION   COSTS  OF  COMMERCE 

seems  proper,  and  to  whatever  extent  circumstances 
seem  to  warrant.  An  application  of  this  law  or  of  its 
principle  of  limitation,  which  should  require  of  the 
straightest  line  between  two  points,  strict  conformity 
to  the  law  as  now  worded,  and  which  should  allow  to 
more  roundabout  lines,  in  some  cases,  a  percentage 
departure  from  this  rule,  might  satisfactorily  meet  the 
difficulty.^  A  more  roundabout  Hne  might  be  allowed 
to  depart  from  the  rule  by  a  larger  per  cent,  than  one 
less  roundabout,  since  otherwise  reduction  of  its  rates 
on  goods  going  over  the  long  distance  might  require 
so  great  reductions  on  its  intermediate  trafl&c  as  to 
deprive  it  of  revenue.  Yet  after  a  certain  degree  of 
roundaboutness  had  been  reached,  further  increase  of 
the  allowed  percentage  departure  from  the  rule  might 
properly  be  refused,  since  an  undue  difference  would 
mean  either  that  the  long-distance  traffic  was  being 
carried  for  less  than  the  additional  cost  occasioned,  or 
that  the  intermediate  traffic  was  being  charged  exor- 
bitant rates. 

The  solution  here  suggested  would  not  do  away  with 
all  uneconomical  roundabout  carrying  of  goods,  but 
neither  would  it  do  away  with  the  stimulus  of  competi- 
tion. It  may  be  better  to  have  competition  even  with 
the  economic  waste  inseparable  from  it,  than  not  to 
have  competition  at  all.  No  government  rate  regula- 
tion can  ever  stimulate  progress  as  competition  does, 
even  if  it  can  successfully  prevent  the  enjoyment  of 
monopoly  profits.  If  the  percentage  of  deviation  from 
the  long  and  short  haul  rule  were  properly  arranged,  no 
road  would  have  any  unfair  advantage  over  any  other, 
and  competition,  so  far  as  it  existed,  would  influence 

» For  further  discussion  along  this  line,  see  Chapter  V  (of  Part  III),  §  i. 


COMPETITION  OF   COMPANIES  49 

intermediate  as  well  as  strictly  competitive  traflfic. 
An  administrative  body  such  as  the  Interstate  Com- 
merce Commission,  may  well,  perhaps,  have  power  to 
decide  in  each  case,  in  view  of  all  the  circumstances, 
the  extent  of  departure  from  the  rule  which  ought 
to  be  allowed,  and  the  amended  Federal  law,  as 
above  stated,  specifically  gives  to  the  Commission  this 
power.^ 

In  the  case  of  ocean  transportation,  there  is,  as  has 
been  pointed  out,'^  no  expense  for  construction  or  main- 
tenance of  way.  It  would  therefore  never  be  worth 
while  to  abandon  a  more  direct  route  in  order  to  save 
expense  of  upkeep.  Unless  winds  or  currents,  etc., 
interfered,  full  cargoes  shipped  at  one  point,  and  des- 
tined to  another,  would  ordinarily  go  direct,  though 
two  or  more  available  routes  may,  not  infrequently, 
be  equally  short  or  otherwise  equally  favored  by 
nature.  A  somewhat  roundabout  route  may  sometimes 
be  chosen  for  the  sake  of  intermediate  traffic,  espe- 
cially in  cases  where  through  traffic  will  not  by  itself 
provide  full  cargoes  sufficiently  often  to  justify  the 
frequency  of  service  desired  by  shippers.  Also,  a 
roundabout  line,  whose  vessels  are  mainly  but  not 
quite  utihzed  by  intermediate  traffic,  will  sometimes 
enter  into  competition  with  a  direct  line  for  through 
traffic,  in  order  to  carry  more  nearly  full  cargoes.  Sail- 
ing vessels  frequently  follow  indirect  routes  to  avoid 
regions  of  calm  and  of  unfavorable  winds,  but  in  such 
cases  the  route  which  is  long  in  miles  may  be  the 
shortest  in  time. 

>  Its  exercise  has  recently  been  upheld  by  the  Supreme  Court.    See  Inter- 
mountain  Rate  Cases,  234  U.  S.,  476. 
« Chapter  I  (of  Part  III),  §  6. 


50   TRANSPORTATION  COSTS  OF  COMMERCE 

§3 

Competition  of  Directions 

The  third  kind  of  competition  which  we  have  to 
consider  is  competition  of  directions.^  To  make  clear 
what  conditions  must  exist  in  order  that  there  should 
be  competition  of  directions,  we  shall  begin  with  an 
assumed  case  where  such  competition  hardly  exists 
in  any  significant  degree.  Suppose  two  roads  leading 
from  A,  which  we  shall  assume  to  be  a  center  of  coal 
mining,  one  to  B  and  the  other  to  C  (figure  2).     If 


A#<; 


Figure  2 

the  roads  AB  and  AC  should  compete  strenuously,  each 
endeavoring  to  carry  the  coal  over  its  own  line  to  B 
and  to  C  respectively,  we  should  have  here  an  example 
of  competition  of  directions.  But  unless  we  make  further 
assumptions,  there  is  Uttle  basis  for  a  conclusion  that 
such  competition  would  take  place.  Neither  road  need 
reduce  its  rate  on  the  coal  to  a  competitive  level  even 

» This,  and  the  kind  of  competition  next  to  be  considered,  are  generally  lumped 
together  with,  it  is  believed,  inadequate  analysis,  under  the  head  of  competition 
of  and  for  markets.  See,  for  example :  Noyes,  A  merican  Railroad  Rates,  Boston 
(Little,  Brown,  &  Co.),  1906,  pp.  125,  126;  Johnson,  American  Railway  Trans- 
portation, 2d  revised  edition.  New  York  (Appleton),  1909,  p.  265;  Ripley, 
Railroads,  Rates  and  Regulation,  pp.  1 18-123. 


COMPETITION  OF   COMPANIES  51 

if  the  other  road  does  so,  and  neither  is  likely  to  gain 
but  is  rather  likely  to  lose  from  taking  the  initiative  in 
such  reduction.  Suppose  the  road  AB  to  make  low 
rates  on  coal  to  B.  It  does  not  follow  that  the  road 
AC  must  make  low  rates  to  C  or  lose  the  traffic.  It  is 
true  that  the  producers  at  A  will  prefer  to  ship  their 
coal  to  the  market  which  will  yield  them,  after  sub- 
traction of  transportation  expenses,  the  largest  return. 
But  the  people  at  C  will  presumably  need  coal,  and  if 
the  road  AC  has  a  monopoly  to  that  point,  it  can  prob- 
ably continue  to  charge  a  high  rate  and  still  get  large 
traffic.  The  people  at  C  will  have  to  pay  a  high  enough 
price  to  cover  this  transportation  expense  and  induce 
producers  at  A  to  send  them  the  coal.  The  road  AB 
will  not  succeed  in  diverting  much  more  than  previously 
of  the  output  of  yl,  to  the  point  B,  and  therefore,  since 
its  rates  are  lower,  will  suffer  a  reduction  of  its  revenues.^ 
Let  us  now  consider  a  situation  in  which  competition 
of  directions  might  accomplish  something  appreciable 
for  the  community.  Suppose,  as  before,  two  roads 
leading,  one  from  A  to  B  and  the  other  from  A  to  C. 
But  suppose  that  both  B  and  C  are  in  part  supplied 
with  coal  by  competing  roads  leading  from  other  coal- 
producing  sections  than  A,  namely,  from  D  and  E 
respectively.  (See  figure  3.)  We  may  suppose,  also, 
that  the  annual  coal  production  of  A  is  not  sufficient 
to  satisfy  completely  both  of  the  markets  B  and  C. 
In  this  situation,  the  lines  AB  and  AC  can  charge  high 
rates  only  by  combination  or  agreement  with  each 
other  and  at  the  expense  of  producers  at  A.     The  price 

*  The  possibility  that  B  may  be  built  up  and  that  industries  may  desert  C, 
and  the  consequent  effects  on  the  revenues  of  the  roads,  will  be  discussed  with  a 
consideration  of  the  fourth  kind  of  competition,  that  of  locations. 


52    TRANSPORTATION  COSTS  OF  COMMERCE 

of  coal  at  B  and  likewise  at  C,  because  of  the  supply 
from  another  source  or  sources  than  A,  cannot  exceed, 
say,  $5  a  ton.  High  railroad  rates  from  A,  e.g.  $3  a 
ton,  cannot  force  consumers  at  B  and  C  to  pay  more 
than  $5,  and  must,  therefore,  result  in  a  return  of  not 
more  than  $2  per  ton  to  producers  at  A.  But  if  the 
line  AB,  for  example,  reduces  its  rate  from  $3  to  $1,  in 
order  to  encourage  larger  shipments  of  coal  from  A  to 
B,  then  the  line  AC  must  reduce  its  rate  on  coal  carried 


k^^ 


C  \  \ 

FiGUBi:'~3 

from  A  to  C,  or  forego  most  of  the  business.^  The  line 
AC  cannot  continue  to  enjoy  high  rates  on  coal  shipped 
from  ^  to  C,  by  imposing  a  higher  price  for  coal  on 
consumers  at  C,  since  competition  of  lines  from  £  to  C 
insures  these  consumers  a  price  not  above  $5  a  ton. 
Neither  can  AC  impose  the  expense  of  $3  per  ton  rates, 
upon  producers  at  A,  thus  keeping  their  net  returns 
down  to  $2  per  ton,  since,  if  ^C  attempts  this,  producers 

1  Unless  we  suppose  that  the  output  at  A  is  considerably  increased,  so  as  to 
leave  a  surplus  for  the  high  rate  road  even  after  a  low  rate  by  the  other  has 
diverted  the  former  output.  But  it  is  not  to  be  supposed  that  capital  will  be 
rushed  to  A  and  the  poorer  mines  previously  unused  be  suddenly  exploited,  for 
no  better  returns  than  could  be  had  before. 


COMPETITION  OF  COMPANIES  53 

at  A  will  ship  most  or  all  of  their  coal  to  B,  over  the 
line  AB,  receiving  about  $5  a  ton  at  B,  paying  $1  a 
ton  freight,  and  having  a  net  return  of  $4  a  ton  at  the 
mines. ^  There  is  competition  of  directions  because  the 
coal  produced  at  A  will  go,  in  the  main,  to  5  or  to  C 
according  to  the  rates  made  by  the  rival  roads  AB  and 
AC,  leading  in  different  directions  from  the  same  pro- 
ducing center. 

Let  us  consider  another  possible  situation.     Suppose 
coal  to  be  produced  at  A  and  at  D  and  to  be  marketed 


at  B  and  C  over  the  railroads  AB,  DB,  AC,  and  DC. 
(See  figure  4.)  Suppose  that,  at  first,  each  of  the  roads 
is  charging  $3  a  ton  to  carry  the  coal  either  from  A  or 
from  D  to  either  B  or  C.  The  price  of  coal  at  B  and 
at  C  is  $6  a  ton,  and,  therefore,  at  the  sources  of  produc- 
tion, A  and  D,  it  is  $3  a  ton.     One  of  the  roads,  for 

>  In  practice,  the  extra  supply  of  coal  at  B  would  tend  to  lower  its  price  there 
somewhat  below  $5  and  to  lower  the  returns  at  .4  somewhat  below  $4.  But  the 
change  in  figures  involved  does  not  change  the  essential  principle  of  the  case. 


54   TRANSPORTATION   COSTS  OF  COMMERCE 

example,  the  road  AC,  reduces  its  rate  to  $2,  hoping 
thereby  to  get  more  of  the  business.  We  have  to  in- 
quire whether  such  an  action  will  force  reduction  on 
any  or  all  of  the  other  roads. 

The  effect  of  the  reduction  by  AC  will  be  different 
according  as  the  benefit  goes  mainly  to  the  producers 
at  ^,  or  to  the  consumers  at  C,  or  is  divided  more  or 
less  equally  between  them.  Suppose,  first,  that  the 
benefit  goes  almost  entirely  to  producers  at  A,  these 
producers  receiving  about  ^  $4  instead  of  $3  per  ton 
for  all  coal  shipped  to  C,  and  the  price  at  C  remaining 
substantially  unchanged.  Then  (assuming  a  limited 
annual  production  at  ^)  the  Hne  AB  would  have  to 
lower  its  rate  between  A  and  B  to  about  $2.  For 
otherwise,  most  of  the  coal  mined  at  A  would  be  shipped 
to  C,  instead  of  the  shipments  being  divided  between 
B  and  C.  Since  the  price  at  B  is,  by  hypothesis,  $6, 
and  the  rate  to  B  $3,  the  miners  at  A  would  get  only 
$3  net  on  coal  shipped  to  B  as  compared  with  nearly 
$4  on  coal  shipped  to  C.  The  road  AB  would,  there- 
fore, have  to  reduce  or  lose  the  business. 

Suppose,  second,  that  the  benefit  of  the  rate  reduction 
by  ^C  goes  almost  entirely  to  the  consumers  at  C, 
in  the  form  of  lower  prices  for  coal,  coal  selling  at  C 
for  little  above  ^  $k  instead  of  for  $6  a  ton.     The  reduc- 


'  Probably  not  quite  $4,  for  the  greater  amount  of  coal  shipped  to  C  in  con- 
sequence of  the  reduced  rate  would  almost  certainly  reduce  the  price  somewhat. 
Yet  this  reduction  of  price  might  conceivably  be  small,  because  of  an  elastic 
demand  at  and  about  C,  and  because  a  small  reduction  of  price  might  discourage 
and  decrease  shipments  of  coal  to  C  from  D. 

'  Probably  somewhat  more  than  $5,  because  the  better  market  for  .4's  coal 
would  be  almost  certain  to  affect  its  price  somewhat.  Nevertheless,  an  inelastic 
demand  at  C,  coupled  with  the  shipping  of  somewhat  more  of  ^'s  output  to  C, 
might  well  result  in  the  consumers  at  C  reaping  most  of  the  gain  from  the  lower 
transportation  rate  on  coal. 


COMPETITION  OF   COMPANIES  55 

tion  by  the  line  AC  may  then  force  an  equivalent  re- 
duction by  the  line  DC.  Since  coal  from  D  can  no 
longer  sell  at  C  for  $6  a  ton,  either  the  coal  producers 
at  D  must  accept  substantially  $1  less  on  the  coal  sent 
by  them  to  C,  namely,  $2  instead  of  $3  per  ton,  or  the 
railroad  DC  must  reduce  its  transportation  charge  from 
$3  to  about  $2.  But  the  coal  producers  at  D  will  not 
be  likely  to  accept  a  much  lower  price  at  the  mine 
than  $3  for  coal  shipped  to  C,  so  long  as  they  can  ship 
coal  to  5  at  a  rate  of  $3  and  sell  it  there  for  $6  a  ton. 
Unless  the  market  at  B  is  decidedly  limited  (or  the  out- 
put of  D  too  great  to  be  mostly  sold  there)  the  line 
DB  will  be  an  effective  competitor  of  the  line  DC, 
for  the  traffic  from  D,  and  if  the  price  of  coal  at  C 
falls,  while  that  at  B  does  not,  the  line  DC  must  reduce 
its  rate  or  lose  much  or  most  of  its  coal  traffic.  It 
would  be  a  superficial  statement  to  say  merely  that  we 
have  here  a  competition  of  the  lines  AC  and  DC  for  the 
market  at  C.  For  DC  would  not  be  under  the  same 
compulsion  that  it  is  under  to  lower  rates,  were  it  not 
for  the  line  DB  and  the  alternative  market  of  D  coal 
at  B.  DCs  competition  is,  therefore,  equally  a  compe- 
tition with  the  hne  DB,  and  may  be  classified  with 
other  cases  of  competition  of  directions.  The  coal 
produced  at  D  has  a  choice  of  the  directions  DC  and 
DB  towards  the  two  possible  markets. 

Suppose,  third,  that  the  benefit  of  the  reduced  rate 
made  by  ^C  goes  about  half  to  the  producers  at  A 
and  half  to  the  consumers  at  C.  Producers  at  A  get 
$3.50  instead  of  $3  per  ton  at  the  mine ;  and  consumers 
at  C  have  to  pay  only  $5.50  instead  of  $6  a  ton.  On 
this  supposition,  the  line  DC  will  have  to  reduce  its 
rate  to  $2.50  to  meet  the  lower  price  of  coal  at  C.     Other- 


S6    TRANSPORTATION   COSTS  OF  COMMERCE 

wise,  i.e.  if  the  loss  from  the  lower  price  at  C  is  thrown 
upon  those  producers  at  D  who  ship  coal  to  C,  no  coal 
miners  at  D  will  send  any  of  their  product  to  C,  but 
will  send  it,  instead,  to  B.  The  possibihty  that  the 
coal  will  go  in  this  other  direction,  i.e.  to  B,  compels 
the  road  DC  to  reduce  its  rate  50  cents.  Also,  the 
road  AB  will  have  to  reduce  its  rate  to  $2.50.  For 
producers  at  A  receive  a  net  return  of  $3.50  on  coal 
sent  to  C.  With  coal  selHng  at  B  for  $6  and  with  a 
$3  rate  to  B,  they  would  receive  but  $3  net  on  coal 
sent  to  B.  They  would,  therefore,  send  little  or  no 
coal  to  B  unless  the  road  AB  reduced  its  rate  to  about 
$2.50.  If  the  benefit  of  AC's  reduction  is  divided 
about  equally,  then,  between  producers  at  A  and  con- 
sumers at  C,  the  roads  DC  and  AB  may  each  be  forced 
to  make  a  reduction  about  half  that  made  by  AC. 
The  rates  charged  by  DB  would  not  have  to  be  lowered 
unless  DC  or  AB  made  a  further  reduction,  or  unless 
the  road  DB  desired  more  traffic  than  before. 

The  situation  is  no  different  if  the  original  reduction 
on  the  line  AC  results,  not  from  a  desire  to  secure  more 
traffic,  but  from  an  order  of  a  government  regulating 
body  such  as  the  Interstate  Commerce  Commission. 
In  either  case,  the  other  road  or  roads  affected  must 
also  make  a  reduction  or  lose  traffic.  It  follows  that 
regulation,  directly,  of  the  rates  of  one  railroad  may 
affect  and  frequently  does  affect,  indirectly,  the  rates 
charged  on  a  number  of  other  railroads. 

One  other  hypothetical  illustration  of  competition  of 
directions  will  be  given.  Let  us  suppose  A  and  C  to 
be  connected  with  each  other  by  the  single  line  AC 
(figure  5) ;  but  suppose  that  the  competition  of  two 
lines  from  A  to  B  (or  government  regulation  of  their 


COMPETITION  OF  COMPANIES  57 

rates)  fixes  a  minimum  price  below  which  coal  producers 
at  A  need  not  sell,  and  that  the  competition  of  two  lines 
from  D  to  C  fixes  a  maximum  price  on  coal  for  consumers 
at  C.  The  line  AC  must  make  a  rate  low  enough  to 
give  the  producers  at  A  as  high  a  price  as  they  can  get 
by  shipping  to  B,  and  to  give  the  consumers  at  C  as 
low  a  price  on  coal  from  A  as  they  have  to  pay  on  coal 


■7^0. 


\ 


o 

o 

o 

o 

o 

o 

o 

o 

o 


Figure  $ 


'^D 


from  D.  Otherwise,  the  Hnc  AC  will  get  no  business 
and  the  coal  produced  at  A  will  be  carried  to  B.  The 
line  AC  may  be  said  to  compete  with  the  lines  from 
D  to  C,  for  the  market  at  C;  and  to  compete  with  the 
lines  from  A  to  5,  in  order  to  carry  coal  produced  at 
A  over  its  Hne  in  the  direction  of  C  It  is  situations 
of  this  general  nature  which  justify  the  statement 
sometimes  made  by  railroad  men  that  they  cannot 
make  rates,  but  merely  put  in  force  rates  made  by 
commercial  conditions.  Nevertheless,  the  so-called  com- 
mercial conditions  which  do  detemiine  these  rates  are 
likely  to  prove,  on  analysis,  to  be  competitive  conditions, 


58    TRANSPORTATION  COSTS  OF  COMMERCE 

as  here  shown,  and  to  be  controllable  in  so  far  as  com- 
petition can  be  controlled. 

It  is  not  difficult  to  find  real  cases  where  railroads 
are  in  one  or  more  of  such  situations  as  have  been  de- 
scribed in  this  section,  and  are  therefore  subject  to 
competition  of  directions.  Consider,  for  instance,  the 
position  of  Hnes  leading  from  various  Michigan  and 
Kansas  salt-producing  points  to  different  and  the  same 
markets,  as  brought  out  in  a  recent  case  before  the 
Interstate  Commerce  Commission.^  A  number  of  trans- 
portation Unes,  rail  and  water,  lead  from  Michigan  salt- 
producing  points  to  various  markets,  and  among  others, 
to  markets  west  and  southwest  of  Michigan,  on  the 
Mississippi  River.  To  these  same  points  on  the  Mis- 
sissippi River,  salt  is  brought  over  different  Hnes,  east 
and  northeast,  from  the  Kansas  salt  fields.  The  Mis- 
sissippi River  lies  about  midway  between  the  Michigan 
and  the  Kansas  centers  of  salt  production.  Points  on 
the  Mississippi,  and  other  points,  farther  west,  as  well, 
may  be  supplied  with  salt  from  the  Kansas  or  from  the 
Michigan  fields  and,  in  fact,  from  different  production 
centers  in  either  of  those  states.  On  the  other  hand, 
many  of  the  salt-producing  centers  have  the  option  of 
shipping  salt  over  any  one  of  several  transportation  Unes, 
either  to  several  of  the  towns  on  the  Mississippi  River, 
or  to  other  points  in  the  same  or  different  directions. 
Here,  then,  are  all  the  conditions  for  competition  of 
directions.  Traffic  from  a  given  producing  center, 
e.g.  Detroit,  Michigan,  would  meet  Hke  goods  from 
another  producing  center,  e.g.  Hutchinson,  Kansas,  or 
some  Michigan  point  other  than  Detroit,  in  a  common 

» Interstate  Commerce  Commission  Reports,  Vol.  XXII,  pp.  407-419,  case 
decided  February,  1912. 


COMPETITION  OF   COMPANIES  59 

market,  St.  Louis.  If  the  Wabash  Railroad,  leading 
from  Detroit  to  St.  Louis,  refused  to  make  reasonably 
low  rates,  it  would  fmd  itself  with  less  trafiic  or  with- 
out tralB&c  in  salt.  Rather  than  bear  the  burden  of  the 
higher  rate,  St.  Louis  dealers  would  secure  salt  from 
Hutchinson  ^  or  other  Kansas  points  or  from  some 
Michigan  point  other  than  Detroit,  e.g.  from  Manistee 
or  Ludington,  and,  therefore,  over  other  transportation 
lines  than  the  Wabash.  Rather  than  accept  less  for 
their  salt  by  virtue  of  the  higher  railroad  rate,  the  salt 
producers  of  Detroit,  being  so  situated  as  to  have  this 
option,  would  prefer  to  ship  their  salt  in  another  direc- 
tion and  to  a  different  market,  for  example,  by  way  of 
a  lake  route  to  Toledo,  Cleveland,  or  Chicago.  As  a 
matter  of  fact,  most  of  the  Michigan  salt,  perhaps  80 
per  cent.,  is  shipped  in  the  first  instance  by  water.  In 
view  of  all  these  conditions,  not  to  mention  others  more 
properly  connected  with  competition  of  locations,  the 
Wabash  Railroad  has  found  itself  compelled  to  make 
rates  on  salt  from  Detroit,  in  reasonable  relation  to  the 
rates  made  by  these  various  competitors. 

We  have  an  illustration  of  what  is  probably,  in  part, 
competition  of  directions  involving  ocean  carriers,  in 
the  export  trade  from  the  United  States  to  South  and 
East  African  ports.  The  rates  charged  are  said  to  be 
maintained,  as  nearly  as  possible,  on  the  same  level  as 
the   rates   from   British   and   continental  ports. ^    But 

>  If  from  Hutchinson,  the  Wabash  might  carry  it  part  of  the  distance,  but  a 
much  less  distance  than  if  from  Detroit.  But  at  St.  Louis,  the  Wabash  has 
particularly  to  fear  competition  from  other  Michigan  sources  of  supply,  not  on 
its  own  line. 

*Huebner,  Report  on  Steamship  Agreements  and  Affiliations  in  the  American 
Foreign  and  Domestic:  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  1914, 
Vol.  IV,  p.  93. 


6o    TRANSPORTATION   COSTS  OF  COMMERCE 

why  must  such  rates  be  made?    Is  it  not  largely  be- 
cause otherwise  the  goods  which  these  vessels  might 
carry  from  America  would  be  shipped  by  producers  in 
other  directions  and  to  different  markets,  either  within 
or   outside  of   the   boundaries  of   the   United   States? 
In  other  words,  is  not  one  of  the  most  important  in- 
fluences to  be  considered,  the  fact  that  the  American 
producers  have  an  alternative  of  which  they  will  avail 
themselves  if  not  granted  reasonably  satisfactory  rates? 
We  may,  indeed,  broaden  our  conception  of  competi- 
tion of  directions,  so  as  to  have  it  include  the  making 
of  rates  to  induce  shipment  of  goods  by  producers,  in 
a  given  direction  and  over  given  transportation  Hnes, 
when  otherwise  some  of  these  producers  would  find  it 
more  profitable  to  engage  in  the  production  of  an  en- 
tirely different  class  of  goods,  marketable  only  in  another 
direction  and  over  other  Hnes.     Thus,  the  ships  leading 
from  American  ports  to  South  and  East  African  ports 
must  charge  on  American  goods,  marketable  in  Africa, 
reasonable  rates  in  relation  to  rates  charged  from  Europe, 
not  only  because  without  such  rates  the  American  pro- 
ducers might  seek  other  markets  for  those  goods,  but 
also  because  these  producers  might,   to  some  extent, 
decide  to  engage  in  the  production  of  other  goods,  not 
marketable  in  Africa.     For  the  American  producers  to 
choose  this  latter  alternative,  no  less  than  for  them  to 
choose  the  former,  would  mean  diminished  freight  for 
the  America-Africa  lines.     In  the  same  way  the  making 
of  low  rates  by  a  railroad  to  enable  a  manufacturing 
plant  to  market  its  produce  and  so  "keep  it  in  business," 
may  often  be,  in  the  last  analysis,  competition  of  this 
sort.     The  persons  operating  the  plant  would  doubt- 
less, in  any  case,  be  engaged  in  some  business,  but  the 


COMPETITION  OF   COMPANIES  6i 

alternative  kind  of  production  might  not  provide  traflSc 
for  the  particular  railroad  in  question.^ 

§4 
Competition  of  Locations 

The  fourth  kind  of  competition  is  competition  of 
locations.  It  is,  by  itself,  perhaps  less  effective  in  pro- 
tecting the  public  against  monopoly  rates  than  any  of 
the  other  three  kinds  of  competition,  and  certainly  less 
effective  than  either  of  the  first  two  kinds.    To  illus- 


FlGTJKE  6 

trate  competition  of  locations,  assume  two  railroad 
lines  leading  into  a  common  terminal  city,  A,  the  one 
coming  from  C  through  B,  and  the  other  from  E  through 
D.  (See  figure  6.)  Let  us  suppose  that  B  is  favorably 
located  for  iron  and  steel  production,  being  in  the  center 

*  It  is  not  improbable  that  railroads  sometimes  make  rates  to  maintain  traffic 
in  a  given  kind  of  goods  over  their  lines,  when  the  nearest  alternative  to  the  per- 
sons producing  those  goods  would  be  the  production  of  other  goods  for  shipment 
over  the  same  railroad.  That  this  is  the  nearest  alternative  may  not  be  realized 
by  the  traffic  officials  of  the  railroad. 


62    TRANSPORTATION  COSTS  OF  COMMERCE 

of  a  coal-producing  district,  and  being  able  to  get  iron 
ore  from  C.  The  market  is  largely  in  and  about  A. 
The  point  D  is  no  less  favorably  located  for  iron  and 
steel  manufacture,  there  being  coal  about  D  and  iron 
ore  about  E.  Iron  and  steel  manufacturers  will  locate 
at  D  in  preference  to  locating  at  B,  provided  they  have 
better  opportunity  at  D,  because  of  low  transportation 
rates,  to  reach  the  market  A  and  secure  a  satisfactory 
profit.  In  general,  the  original  and  continued  location 
of  an  industry  in  any  center  of  production  depends,  in 
part,  upon  the  transportation  rates  it  can  get,  and 
particularly  upon  the  rates  made  to  markets  where 
competitors  from  other  producing  centers  must  be  met. 
High  rates  to  points  on  the  same  line,  where  the  com- 
petition from  other  sources  of  production  is  not  equally 
to  be  feared  may,  if  necessary,  be  shifted  to  consumers. 
The  industry  may,  therefore,  continue  to  exist  in  a 
given  center  of  production  even  without  low  rates 
into  a  common  market,  because  of  its  sale  in  territory 
which  is  less  competitive ;  but  it  will  not  be  carried  on 
in  that  center  of  production  to  the  same  extent.  In 
this  sense,  the  rates  charged  influence  the  location  of 
the  industry,  i.e.  the  extent  of  its  location  at  any  pro- 
ducing center.  In  our  assumed  case,  the  rate  on  the 
iron  and  steel  products  from  D  to  A  must  be  low  enough, 
along  with  the  rate  on  iron  ore  from  E  to  D,  and,  per- 
haps, on  other  needed  suppUes,  machinery,  and  food 
for  workers,  from  both  A  and  E  into  D,  so  that  con- 
ditions as  a  whole  will  favor  existence  of  the  industry 
at  D  as  well  as  at  B.  Otherwise,  the  Hne  EDA  may 
find  itself  with  an  unprofitably  hght  traffic. 

Yet  this  kind  of  competition  is  Hkely  to  be  relatively 
unimportant  in  its  effect  on  rates.     If  the  manufacturers 


COMPETITION  OF   COMPANIES  63 

at  D  have  natural  advantages  over  those  at  B,  are 
nearer,  for  example,  to  the  market  and  to  a  source  of 
iron  ore,  the  line  serving  D  can  charge  considerably 
higher  rates  in  proportion  to  distance,  or  perhaps  rates 
absolutely  higher,  than  the  line  serving  B,  and  still 
keep  the  manufacturing  industry  in  its  territory.  If, 
therefore,  a  railroad  has,  throughout  any  part  of  its 
territory,  no  competition  to  meet  but  the  competition 
of  locations,  it  is  pretty  certain  that  it  can  make  some 
of  its  rates  high,  even  rates  to  a  common  market,  with- 
out corresponding  loss  of  traffic.  The  loss  would  fall 
upon  the  owners  of  favorably  situated  land.  Thus,  to 
take  another  example,  high  rates  on  wheat,  if  the  wheat 
is  produced  on  exceptionally  good  land,  or  high  rates 
compared  to  distance,  if  it  is  produced  near  a  market, 
will  simply  reduce  the  profits  of  agricultural  land  owners, 
but  will  not  cause  them  to  abandon  their  fields,  though 
they  may,  in  consequence,  cultivate  not  so  intensively. 
Competition  of  locations  has  existed  in  the  past, 
and  probably  in  some  degree  still  exists,  in  the  trans- 
portation of  lumber  from  Minneapolis,  Milwaukee, 
Chicago,  Winona,  La  Crosse,  Eau  Claire,  and  other 
points  in  northern  Michigan  and  along  the  Mississippi 
River,  to  Missouri  River  points,  e.g.  Kansas  City, 
Omaha,  Sioux  City,  etc.,  as  consuming  centers.^  Many 
of  these  Missouri  River  cities  were  common  markets 
served  by  more  than  one  railroad.  Each  railroad 
desired  that  such  a  common  market  or  markets  should 
be  supplied  most  largely  from  lumber  production  along 
its  own  lines.  Rates  made  by  any  one  such  road,  un- 
duly high  in  relation  to  rates  made  by  its  rivals  serv- 
ing other  centers  of  lumber  production,  meant  that  the 

*  Interstate  Commerce  Commission  Reports,  Vol.  V,  pp.  264-298. 


64    TRANSPORTATION   COSTS  OF  COMMERCE 

production  of  lumber  on  its  line  would  decrease  or 
cease.  Producers  would  prefer  to  engage  in  the  busi- 
ness at  a  point  where  rates  were  not  so  high.  Until 
an  agreement  was  reached  by  the  various  roads,  in  1884, 
fixing  the  relation  of  rates  to  be  charged  from  various 
lumber  centers,  there  was  a  considerable  amount  of 
keen  competition  among  the  railroads  concerned. 
Where  the  rates  of  different  transportation  companies 
are  so  adjusted,  each  to  each,  reduction  of  the  rates  of. 
one,  by  order  of  a  government  regulating  commission, 
may  indirectly  force  reduction  of  the  rates  of  others. 

Where  the  competition  is  a  competition  of  directions 
or  a  competition  of  business  locations,  as  well  as  where 
it  is  a  competition  of  routes,  it  may  sometimes  be  not 
undesirable  that  some  goods  should  be  carried  over  a 
longer  instead  of  all  being  carried  over  a  shorter  route. 
For  the  longer  route  may  sometimes  have  enough  more 
intermediate  trafl&c  so  that  it  can  afford  to  take  the 
longer  distance  traffic  for  lower  rates  than  a  shorter 
route  can  afford.^ 

§5 

Competition  against  Potential  Local  Self-sufficiency 

Besides  competing  with  each  other,  transportation 
companies  may  be  said  to  compete,  also,  in  a  sense, 
with  local  self-sufiiciency.  Especially  when  distances 
are  great,  reasonably  low  rates  per  mile  are  necessary, 
in  order  that  different  districts  should  specialize  in  dif- 
ferent lines  of  activity  and  exchange  their  various 
products  with  each  other.  High  transportation  rates 
compel,  in  each  district,  a  greater  degree  of  self-sufl&- 
ciency.    Low  rates  promote  commerce.    To  some  extent, 

»  Cf.  §  2  of  this  Chapter  (II  of  Part  IH). 


COMPETITION  OF   COMPANIES  65 

transportation  companies  doubtless  bid  for  the  business 
of  transporting  goods  over  long  distances,  thus  taking 
part  in  the  competition  of  shippers  with  local  producers 
in  the  territory  to  which  the  goods  are  sent. 

To  illustrate,  suppose  two  sections  of  the  country, 
A  and  B,  1000  miles  apart  but  joined  by  the  railroad 
AB.    (See  figure  7.)    The  general  level  of  prosperity 

k^ ^B 

FiomiE  7 

in  other  industries  at  A  may  be  such  that  no  one  will 
mine  coal  there  (of  which  there  are  deposits)  for  less 
than  $3  a  ton.  In  J5,  on  the  other  hand,  conditions  are 
such  that  coal  cannot  be  produced  and  sold  locally  for 
less  than  $5  a  ton  and  yield  as  good  a  return  on  labor 
and  investment  as  other  local  industries.  Unless  the 
railroad  AB  makes  a  rate  of  $2  a  ton  or  less  for  carrying 
coal  1000  miles,  B  will  produce  its  own  coal,  A  will 
probably  engage  more  largely  in  the  production  of 
goods  for  local  use,  and  the  railroad  AB  will  not  get 
the  coal  trafl&c. 

Such  competition  with  local  self-sufficiency  has  been 
of  recent  importance  in  Indiana.  In  the  northern  part 
of  that  state,  many  wagon  roads  have  been  in  process 
of  construction.  In  the  building  of  these  roads,  there 
has  frequently  been  the  alternative  of  using  gravel  from 
gravel  pits  within  a  few  miles  of  the  roads  to  be  made, 
or  crushed  stone  from  various  quarries  near  Chicago, 
Toledo,  and  Milwaukee.  The  railroads  have  made  low 
rates  on  the  crushed  stonc,^  in  order,  by  enabling  quarry 
owners  to  ship  their  product,  to  get  traffic  which  other- 
wise could  not  have  been  had. 

1  McPherson,  Railroad  Freight  Rales,  p.  14a. 

PART  m  —  r 


66   TRANSPORTATION  COSTS  OF  COMMERCE 

§6 

Two  Senses  of  "What  the  Traffic  Will  Bear" 

The  classic  and  usual  statement  with  regard  to  rates 
independently  made  by  railroads,  i.e.  made  without  di- 
rection or  interference  from  government,  is  that  these 
rates  are  made  on  the  basis  of  ''what  the  trafi&c  will 
bear."  ^  This  statement,  properly  understood,  is  cor- 
rect, but  its  meaning  requires  some  explanation.  To 
say  that  a  railroad  leading  from  the  Pennsylvania  coal 
fields  to  New  York  City  will  charge,  on  coal  shipped 
to  New  York,  what  the  traffic  will  bear,  does  not  mean 
that  if  higher  rates  are  charged,  the  railroad  will  not 
get  any  trafi&c  at  all.  Neither  does  it  mean  that  at 
lower  rates  the  railroad  would  not  get  more  traffic. 
It  means,  simply,  that  the  rates  charged,  when  there  is 
no  legal  regulation  and  when  the  interests  of  the  railroad 
are  chiefly  or  solely  considered,  will  always  be  the  rates 
yielding  the  largest  net  returns  on  capital  invested.^ 
Higher  rates  will  so  decrease  traffic  that  even  the  larger 
return  per  unit  business  will  be  a  smaller  net  return  on 
capital.  Lower  rates  will  usually  increase  traffic,  but 
will  not  increase  it  enough  to  compensate  for  the  smaller 
return  per  unit  business  and  the  larger  expense  of  carry- 
ing more  goods.  On  any  special  kind  or  class  of  traffic, 
therefore,  the  rates  charged  by  a  given  railroad  are 
those  yielding  it  the  greatest  profit ;  or,  in  this  sense  of 
the  expression,  the  rates  charged  are  what  the  traffic 
will  bear. 

But  though  monopolistic  as  well  as  competing  transpor- 

1  Hadley,  Railroad  Transportation,  New  York  (Putnam),  1885,  p.  iii. 
'  Far-sighted  management  may  of  course  consider  the  future  as  well  as  the 
present. 


COMrETITION  OF   COMPANIES  67 

tation  companies  base  their  rates  on  what  the  traffic 
will  bear,  the  conditions  determining  monopolistic  rates 
are  markedly  different  from  those  lixing  competitive 
rates.  The  rates  which  monopolized  traffic  will  bear 
are  usually  higher  than  the  rates  which  competitive 
traffic  will  bear.  A  transportation  company  having  a 
monopoly  is  concerned  only  with  the  effect  of  its  rates 
on  the  total  volume  of  traffic  within  its  territory,  for 
its  own  traffic  is  synonymous  with  this  total  traffic. 
Its  only  fear  is  that  its  rates  may  be  so  high  as  to  de- 
stroy transportation  business.  Such  a  company's  rates 
need  only  be  what  the  traffic  will  bear  without  being  de- 
stroyed in  whole  or  in  part. 

A  transportation  company  having  competitors,  how- 
ever, is  interested  not  only  in  the  effect  its  rates  may 
have  on  the  total  transportation  business  of  the  territory 
it  serves,  but  also,  and  usually  to  a  much  greater  extent, 
in  the  effect  its  rates  may  have  on  its  own  business  com- 
pared with  that  of  its  rivals.  A  sHght  change  in  its 
rates  will  probably  make  very  httle  difference  in  the 
total  amount  of  goods  carried  in  the  given  territory, 
even  if  its  rivals  make  exactly  similar  changes.  But  a 
slight  change  in  its  rates,  if  its  rivals  do  not  make  similar 
changes,  will  probably  affect  very  greatly  the  amount 
of  business  done  by  the  particular  company  making 
the  change.  A  slightly  higher  rate  will  result  in  divert- 
ing much  or  most  of  its  business  to  its  rivals.  A  slightly 
lower  rate  will  result  in  its  getting  business  away  from 
them.  We  may  say,  therefore,  that  the  rates  charged 
by  a  transportation  company  subject  to  competition 
will  be  what  the  traffic  will  bear  without  beitig  diverted. 

What  the  traffic  will  bear  without  being  destroyed, 
is  generaUy  more  than  what  the  traffic  will  bear  without 


68    TRANSPORTATION  COSTS  OF  COMMERCE 

being  diverted.  Therefore,  monopoly  rates  are  gener- 
ally higher  in  proportion  to  distance  or  to  service  ren- 
dered, than  competitive  rates.^  It  is  commonly  deemed 
essential  to  regulate  monopoly  rates  by  government 
for  the  protection  of  the  general  pubHc  and  for  the 
furtherance  of  commerce.  Unregulated  monopoly  rates, 
though  they  will  not  be  made,  with  intention,  so  high 
as  to  decrease  net  profits,  may,  nevertheless,  be  made 
so  high  that  the  volume  of  commerce  becomes  smaller 
than,  for  the  greatest  national  wealth,  it  ought  to  be. 
A  monopoHstic  transportation  company  can  well  afford 
to  charge  rates,  for  carrying  a  given  kind  of  goods 
between  two  points,  20  per  cent,  above  a  competitive 
level,  if  its  doing  so  makes  its  traffic  less  than  it  other- 
wise would  be  by  only  10  per  cent.  Yet  the  monopoly 
rates,  in  thus  making  traffic  less,  even  by  but  10  per 
cent.,  would  be  preventing  commerce  which  ought,  for 
the  general  welfare,  to  take  place. 

§7 

Summary 

Competition  of  transportation  companies  with  each 
other  we  have  seen  to  be  of  four  kinds  :  competition  of 
different  companies  over  the  same  route,  competition 
of  routes,  competition  of  directions,  and  competition  of 
locations.  In  addition,  a  transportation  company  may 
be  said  to  compete,  in  a  sense,  with  potential  local  self- 
sufficiency.  Competition  of  different  companies  over  the 
same  route  applies  particularly  to  competition  on  open 

>  Cf.  Carver,  The  Distribution  of  Wealth,  New  York  (Macmillan),  1904,  p.  48. 
See  also  article  by  the  present  writer  in  the  Quarterly  Journal  oj  Economics, 
August,  1908,  entitled  Competitive  and  Monopolistic  Price  Making. 


COMPETITION  OF   COMPANIES  69 

waterways.  In  the  case  of  railroads,  the  right  of  way 
of  one  company  is  generally  used  only  by  that  company. 
Competition  of  routes  applies  both  to  railways  and  to 
waterways.  The  other  kinds  of  competition  are  of 
more  importance  in  relation  to  railways,  though  not  in- 
conceivable in  the  case  of  water  transportation. 

When  two  or  more  routes  join  two  given  points,  the 
usual  rule  is  that  transportation  over  the  shortest  or 
the  most  level  route  is  the  most  economical,  although  it 
does  not  necessarily  follow  that  the  beneficial  stimulus 
of  competition  and  its  protection  of  the  pubHc  against 
monopoly  should  be  sacrificed  to  enforce  the  carriage 
of  goods  by  the  shortest  available  line.  On  the  other 
hand,  there  are  cases  where  a  longer  line  is  a  more  eco- 
nomical one  for  the  carriage  of  goods  between  two 
given  points,  than  a  shorter  one.  In  the  first  place, 
the  trafl&c  may  be  in  excess  of  the  carrying  capacity  of 
the  more  direct  line,  and  it  may  be  better  to  use  the 
longer  line,  even  though  the  profit  is  small,  than  to  in- 
vest additional  capital  in  railroad  plant.  In  the  second 
place,  it  may  be  preferable  to  build  a  roundabout  rather 
than  a  direct  line  (or  than  more  tracks  on  a  direct  line 
already  built)  to  carry  traffic  unprovided  for  between 
two  points  if  the  roundabout  line  taps  enough  more 
intermediate  traffic  than  the  direct  line  (or  than  the 
new  trackage  on  the  direct  Hne  could  add),  so  that  the 
longer  distance  traffic,  having  to  pay  less  of  the  general 
expenses  and  profits,  can  be  carried  by  the  roundabout 
line  more  cheaply.  In  the  third  place,  if  facilities  be- 
tween two  points  are  in  excess  of  traffic,  and  one  line 
has  to  be  abandoned,  it  may  be  preferable  to  abandon 
a  shorter  line  rather  than  a  longer,  provided  the  longer 
line  has  much  more  of  intermediate  traffic  which  helps 


70    TRANSPORTATION  COSTS  OF  COMMERCE 

it  to  be  profitable  and  enables  it  to  carry  goods  between 
the  two  given  points  for  a  relatively  low  rate. 

Competition  of  directions  exists  when  each  of  two 
(or  more)  lines  is  compelled  to  make  rates  from  a  given 
center  of  production,  based  on  the  rates  made  by  a 
rival  leading  in  a  different  direction  and  to  a  different 
market.  That  this  competition  may  be  effective,  there 
must  be  other  conditions  —  in  our  illustrations  other 
transportation  lines  —  influencing  prices  in  both  mar- 
kets or  in  the  source  of  production  and  at  least  one  of 
the  markets. 

Competition  of  locations  exists  when  transportation 
Hues  endeavor  to  make  conditions  favorable  for  various 
industries,  in  territories  which  they  serve,  by  reasonable 
rates  on  raw  materials,  finished  products,  etc.,  in  order 
that  the  industries  may  develop  along  their  lines  instead 
of  elsewhere.  These  last  two  kinds  of  competition  have 
doubtless  some  importance,  but  are  less  effective  than 
the  first  and  second  kinds. 

Monopoly  rates  are  usually  higher  than  competitive 
rates,  because  the  former  are  based  on  what  traffic  will 
bear  without  being  destroyed,  while  the  latter  are  based 
on  what  traf&c  will  bear  without  being  diverted;  and 
because  a  rise  in  a  transportation  company's  rates 
which  would  have  almost  no  effect  in  decreasing  the 
total  amount  of  traffic  would,  if  the  company  has 
competitors,  cause  most  of  its  business  to  be  diverted 
to  them.  Unregulated  monopoly  rates  may  prevent 
commerce  which  is  economically  desirable. 


CHAPTER   III 
Transportation  Monopoly 


Monopoly  of  Rail  Transportation 

Railroads  are  usually,  if  not  always,  partial  mo- 
nopolies. However  much  the  kinds  of  competition  we 
have  described  may  affect  rates  on  traffic  to  and  from 
large  competitive  centers,  there  is  on  nearly  every  rail- 
road intermediate  traffic  not  correspondingly  subject  to 
competitive  influence. 

Even  as  to  traffic  between  competitive  points,  compe- 
tition has  often  been  checked  by  some  form  of  rate  agree- 
ment among  the  rival  railroad  companies.  Experience 
early  showed  that  there  was  sometimes  great  temptation 
for  one  or  more  of  the  companies  to  depart  from  the 
agreed  rates,  not  unusually  by  secret  arrangement  with 
a  favored  shipper  or  shippers,  in  order  to  get  greater 
traffic  at  the  expense  of  the  other  parties  to  the  agree- 
ment. Hence  various  pooling  devices  were  adopted. 
These  pooling  devices  involved  ^  either  a  division  of  the 
business  in  some  definite  proportions  among  the  roads 
concerned,  or  a  division  of  the  earnings  from  the  business. 
When  the  latter  plan  was  determined  upon,  each  road 
was  entitled  to  carry  all  the  freight  it  could  get,  but  must 

>See  Hadley,  Railroad  Transportation,  New  York  (Putnam),  i88s,  P-  74; 
or  Johnson,  American  Raihvay  Transportation,  2d  revised  edition.  New  York 
(Appleton),  1909,  pp.  224,  225. 

71 


72    TRANSPORTATION  COSTS  OF  COMMERCE 

divide  any  surplus  profits  so  made,  with  the  other  parties 
to  the  pool.  To  enforce  this  provision  it  was  frequently 
required  of  each  company  that  it  keep  a  considerable 
sum  on  deposit  in  a  common  treasury,  this  sum  to  be 
forfeited  in  case  of  violation  of  agreement.^ 

The  Interstate  Commerce  Act  of  1887  made  pooling 
by  railroads  illegal,  and  the  kinds  of  arrangement  above 
described  had  to  be  dropped.  For  a  time  the  railroads 
of  the  United  States  attempted  to  make  and  enforce 
rate  agreements  by  means  of  their  traffic  associations, 
even  though  pooling  was  forbidden.  The  Joint  Traffic 
Association  of  1896  made  departure  from  its  recom- 
mended rates  punishable  by  fines.  But  in  the  mean- 
while the  Sherman  Anti-trust  Act  had  been  passed  in 
1890,  and  this  act  was  so  interpreted  by  the  Supreme 
Court  in  the  Trans-Missouri  Freight  Association  case 
(1897)  ^  and  in  the  Joint  Traffic  Association  case  (1898) ' 
as  to  forbid  any  agreement  for  the  maintenance  of  rates. 
The  same  law  was  interpreted  by  the  Supreme  Court 
in  the  Northern  Securities  case,^  in  1904,  to  forbid  the 
holding  of  the  stock  of  two  potentially  competing  roads 
by  a  holding  company.  And  in  191 2  this  tribunal,  in  a 
case  involving  the  possession  of  stock  by  the  Union 
Pacific  in  the  Southern  Pacific  Railroad,^  decided  that 
it  was  illegal  for  any  railroad  company  to  hold  a  control- 
ling interest  (even  less  than  a  majority  of  stock,  if 
substantial  control  was  thus  secured)  in  what  might 
otherwise  be  a  competing  railroad.  By  the  terms  of  the 
new  Clayton  Act,^  interholding  of  stock  and  the  holding 
of  stock  by  so-called  "holding"  companies  is  prohibited, 

'Johnson,  American  Railway  Transportation,  p.  240. 

» 166  U.  S.,  2go.  » 171  U.  S.,  SOS-  *  193  U.  S.,  I97- 

»  226  U.  S.,  61.  'October,  1914. 


TRANSPORTATION  MONOPOLY  73 

where  the  effect  may  be  a  substantial  lessening  of  com- 
petition. But  it  is  doubtful  whether  this  prohibition 
really  adds  much  to  the  Anti-trust  Law  of  1890  as  that 
law  has  been  interpreted  by  the  Supreme  Court.  Repre- 
sentatives of  different  systems  of  course  meet  in  the 
conferences  of  the  various  traffic  associations  to  discuss 
traffic  conditions,  and  these  meetings  bring  about 
informal  understandings  regarding  rates. ^  But  any 
formal  agreement  to  maintain  rates  is  illegal. 

It  can  hardly  be  said  that  complete  monopoly  is  in- 
evitable in  railway  transportation,  on  the  ground  that 
competition  is  necessarily  ruinous.  Competition  is  not 
necessarily  ruinous.  To  begin  with,  as  we  have  already 
seen,  there  is  on  almost  every  railroad  intermediate 
traffic  for  which  there  is  no  competition.  Furthermore, 
even  if  all  traffic  were  strictly  competitive,  competition 
would  not  be  likely  to  reduce  average  profits  below  a 
fair  return  on  capital,  unless  transportation  faciUties 
were  in  excess  of  traffic  requirements.  When  the 
traffic  available  at  reasonable  rates  taxes  the  plants  of 
all  the  railroads  between  any  two  points,  no  one  of  the 
roads  needs  to  reduce  its  rates  to  an  unprofitable  level 
even  if  its  rivals  choose  to  reduce  theirs.  For,  by 
hypothesis,  its  rivals  cannot  carry  all  the  traffic,  and 
there  will  still  be  business  for  the  non-reducing  road. 
Nor  can  we  assume  that  the  reducing  companies  will 
care  to  enlarge  their  plants  so  as  to  carry  larger  traffic, 
unless  the  rates  which  can  be  charged  are  profitable. 
When  additions  to  plant  are  made,  at  least  if  they 
are  made  by  companies  already  in  the  field  rather  than 
by  the  building  of  rival  roads,  these  additions  may  be 
gradual    and    not    greater    than    gradually    increasing 

1  Johnson,  American  Railway  Transportation,  p.  248. 


74    TRANSPORTATION   COSTS  OF  COMMERCE 

business  requires.  Additional  and  larger  cars,  additional 
switches  to  permit  more  frequent  train  service,  perhaps 
an  additional  track  where  traffic  is  most  dense,  will  not 
of  necessity  so  alter  the  relation  between  facilities  and 
requirements  as  to  bring  about  cutthroat  competition. 

If,  however,  a  new  railroad  is  constructed  when  exist- 
ing roads  are  adequate,  or  if  temporary  decline  of  busi- 
ness, as  during  an  industrial  depression  or  during  a  dull 
season,  makes  facilities,  for  the  time  being,  in  excess  of 
traffic  needs,  unchecked  competition  may  reduce  rates 
below  a  profitable  level.  Each  road  will  take  traffic 
which  yields  Httle  towards  general  expenses  and  fixed 
charges,  rather  than  not  get  such  traffic.  Hoping  to 
secure  at  the  expense  of  their  rivals,  by  charging  very  low 
rates,  the  large  amount  of  traffic  necessary  to  make 
such  rates  cover  general  and  other  expenses,  the  man- 
agers of  each  road  may  succeed  only  in  reducing  their 
road  to  bankruptcy.^  For  if  every  other  road  concerned 
reduces  rates  in  the  same  degree,  the  reductions  by  the 
one  road  will  not  probably  much  increase  its  business 
so  as  to  make  the  low  rates  profitable.  Nevertheless, 
the  excessive  rate  reductions  result,  in  large  part,  from 
the  existence  of  more  transportation  faciHties  than  can 
be  fully  utiHzed.  They  are  not  the  invariable  and  in- 
evitable consequences  of  all  railroad  competition. 

It  has  often  been  argued  that  such  cutthroat  com- 
petition, and  the  discrimination  in  favor  of  competitive 
traffic  to  which  it  leads,  can  be  most  effectively  pre- 
vented by  removing  the  prohibition  against  rate  agree- 
ments, even,  perhaps,  making  them  legally  enforcible, 
and  by  giving  legal  recognition  to  pooling.^     Such  a 

1  Cf.  Hadley,  Railroad  Transportation,  pp.  70-74- 
>  Cf.  Chapter  IV  (of  Part  III),  §  2. 


TRANSPORTATION  MONOPOLY  75 

change  in  governmental  policy  might  not  be  unwise 
—  would,  in  fact,  be  highly  desirable  —  if  all  permitted 
agreements  were  required  to  receive  the  sanction  of  the 
Interstate  Commerce  Commission.  But  it  must  be 
remembered,  first,  that  the  era  of  speculative  railroad 
building  in  the  United  States  has  probably  passed  ;  and 
second,  that  the  Elkins  Law  (of  1903),  by  prohibiting 
departures  from  published  rates,  and  the  Interstate 
Commerce  Law  (as  revised  in  1906),  by  insisting  that 
no  rate  changes  shall  be  made  without  30  days'  notice, 
have  operated  to  prevent  the  old-time  competition  with 
its  accompaniment  of  demoralized  rates.  Hence,  the 
importance  of  permitting  agreements  is  less  than 
formerly,  though  there  are  probably,  still,  occasions 
when  recognized  agreements  would  be  beneficial. 

So  far  as  there  is  monopoly  of  rail  transportation, 
from  any  cause,  the  American  pubhc  and  its  trade  inter- 
ests are  protected  by  the  rate-regulating  power  of  the 
Interstate  Commerce  Commission  and  the  various  state 
commissions.  By  the  amendments  of  1906  and  1910  to 
the  Interstate  Commerce  Law,  the  Interstate  Commerce 
Commission  was  given  the  power  to  fix  maximum  charges 
for  any  (interstate)  traffic  after  investigation,  and  to 
suspend  proposed  rate  advances  for  a  total  period  not 
to  exceed  10  months,^  pending  examination  as  to  the 
justification  of  such  advances. 

§  2 
Agreements  between  Navigation  Companies 

Transportation  on  natural  waterways,  particularly 
on  the  ocean,  is,  it  would  appear,  less  likely  to  be  con- 

'  More  precisely  1 20  days  plus,  if  necessarj'>  a  further  period  of  6  months. 


76    TRANSPORTATION  COSTS  OF  COMMERCE 

trolled  by  monopoly,  is  more  subject  at  all  terminals 
(or  ports)  to  competition,  than  is  transportation  by  rail. 
The  principal  reason  for  this  difference  is  the  fact  that 
the  way  or  route  costs  nothing  and  is  open  to  all  com- 
panies on  equal  terms,  while,  in  the  case  of  railways, 
the  way  or  route  is  expensive  and  can  be  used  only  by  the 
company  which  owns  it.  Railway  traffic  between  two 
points  is  often  subject  to  monopoly  control  because 
there  is,  between  those  points,  only  traffic  enough  to 
justify  a  single  line.  Another  company,  choosing  to 
compete  for  this  traffic,  would  have  to  construct  an  en- 
tire new  roadway  between  the  points  in  question.  The 
investment  of  the  second  company  might  have  to  be  as 
great  as  that  of  the  first,  in  order  for  it  to  compete  at  all. 
Its  investment  would  almost  certainly  be  a  considerable 
fraction  of  that  of  the  first.  So  large  an  addition  to  the 
total  railway  plant  connecting  two  places  would  be  likely 
to  mean  no  adequate  return  on  the  new  capital,  and  it 
might  mean,  since  general  expenses  run  on  even  when 
traffic  is  small,  no  return  whatever.  Under  these  cir- 
cumstances a  new  line  would  seldom  be  constructed. 
There  would  be  no  competition.  There  would  only  be 
one  route  or  way.  One  company  would  own  it  and  no 
other  could  use  it.  The  owning  company  would  have 
the  situation  entirely  in  its  own  hands  and  could  charge 
what  it  desired,  subject  only  to  legal  limitations  and  the 
less  direct  kinds  of  competition.^ 

In  the  case  of  water  transportation,  however,  the 
situation  is  different.  In  order  for  a  competition  to  be 
started  against  a  company  already  engaged  in  carrying 
goods  between  two  points,  it  is  not  necessary  that 
another  company  shall  be  found,  willing  and  able  to 

»  See  previous  Chapter  (II  of  Part  III),  §§  3,  4.  5- 


TRANSPORTATION  MONOPOLY  77 

provide  capital  enough  for  the  construction  of  perhaps 
hundreds  of  miles  of  roadbed  and  track,  or  willing  and 
able  to  duplicate  or  nearly  duplicate  the  plant  of  its 
already  present  rival.  Though  the  earlier  company  may 
have  a  fleet  of  a  hundred  vessels,  yet  if  the  new  company 
can  build  one  or  two  vessels,  it  is  at  once  in  a  position  to 
compete  for  whatever  part  of  the  trade  it  can  handle. 
In  a  sense,  a  new  company  can  compete  by  building  for 
this  particular  trade  a  fraction  of  a  vessel,  that  is,  it 
can  build  a  vessel  to  engage  partly  in  other  trade  and 
partly  in  this  particular  competitive  trade.  A  tramp 
vessel,  going  into  all  oceans,  now  here  and  now  there, 
and  seeking  traffic  in  cargo  lots,  may  be  built  and  turned, 
in  part,  to  the  trade  previously  monopolized.  When- 
ever the  rates  of  the  regular-line  steamers,  those  sailing 
on  schedule,  exceed  the  charter  rate  for  tramp  steamers, 
large  shippers  are  likely  to  patronize  the  tramp  vessels.^ 
Even  small  shippers,  who  cannot  alone  accumulate 
sufficient  cargoes  to  justify  the  chartering  of  vessels,  are 
enabled  to  utilize  tramp  vessels  through  the  intermedia- 
tion of  charter  brokers  who  accumulate  the  cargoes  of 
numbers  of  merchants  and  who  charter  vessels  to  carry 
these  cargoes. 2 

Nevertheless,  traffic  agreements  and  other  devices  to 
maintain  monopoly  or  partial  monopoly  are  common, 
and  appear  to  be  not  altogether  ineffective,  in  water 
transportation.  "Practically  all  the  well-known  lines 
connecting  North  Atlantic  American  ports  with  those  of 
the  United  Kingdom,  North  Europe,  and  the  Mediter- 

1  Huebner,  Report  on  Steamship  Agreements  and  AjSiliations  in  the  American 
Foreign  and  Domestic  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  Vol.  IV, 
1914,  p.  299. 

*Ibid. 


78    TRANSPORTATION  COSTS  OF   COMMERCE 

ranean,  have  been  parties  to  numerous  freight  agreements 
covering,  in  one  way  or  another,  nearly  every  sphere  of 
the  American-European  trade. "  ^  It  appears  that  ''over 
40  regular  trans-Atlantic  lines  have  been  parties  in  their 
respective  trades  to  at  least  20  agreements  involving  the 
freight  trafi&c,  and  that  the  important  Hues  have  been 
members  of  at  least  four  main  freight  conferences."  ^ 

In  some  instances  the  traffic  is  indirectly  apportioned 
by  an  allotment  of  the  ports  of  sailing.  Thus,  the  Ham- 
burg-American and  the  North  German  Lloyd  companies 
have  had  an  agreement  by  which  Hamburg  is  reserved 
for  the  former  and  Bremen  for  the  latter  as  regards  sail- 
ings from  all  American  ports  north  of  Savannah.^  In 
the  American-Asiatic  trade  not  only  have  there  been 
agreements  as  to  rates  both  eastward  and  westward, 
but  there  have  also  been  arrangements  to  the  effect  that 
the  net  freights  earned  should  be  pooled.^  Sometimes, 
also,  there  has  been  an  agreed  limit  to  the  number  of 
sailings  to  be  made  by  each  of  several  lines,  and  occasion- 
ally there  has  been  a  limitation  placed  upon  the  amount 
of  freight  which  some  line  or  lines  may  carry .^ 

Control  of  transportation  by  so-called  conference 
lines  is  furthered  by  the  deferred  rebate  system.  Under 
this  system  it  is  arranged  that  shippers  who  agree  to  use 
only  the  vessels  of  the  conference  lines  in  a  given  trade  or 

iHuebner,  Report  on  Steamship  Agreements  and  Affiliations  in  the  American 
Foreign  and  Domestic  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  Vol.  IV, 
1914,  p.  59.  This  report,  referred  to  here  and  in  the  following  pages,  was  made  just 
before  the  outbreak,  of  the  present  war,  which  has,  as  is  well  known,  tended  to 
disorganize  conditions  of  ocean  commerce,  but  not,  of  course,  by  rate  reductions. 
Agreements  are  not  now  necessary  even  to  keep  rates  far  above  their  normal 
level.  Some  lines  which  were  parties  to  agreements  are  not,  at  present,  carry- 
ing on  business. 

^Ibid.  *Ibid.,  p.  71. 

*  Ibid.,  p.  117.  '^Ibid.,  p.  285. 


TRANSPORTATION  MONOPOLY  79 

trades,  shall  receive  a  rebate  of  some  5  or  10  per  cent,  on 
their  freight  bills,  which  rebate  is  payable  to  them  per- 
haps six  months  after  the  end  of  the  period  for  which  it 
is  computed.  Any  shipper  who,  at  any  time  before  the 
period  of  deferment  has  expired,  ships  goods  by  other 
than  the  conference  Hnes,  loses  the  benefit  of  the  rebate.^ 
The  deferred  rebate  system  is  apphed,  for  example,  in 
the  westbound  trade  from  the  Far  East  through  the 
Suez  canal  to  the  United  States  ^  and  in  the  trade  between 
the  United  States  and  South  America.^ 

It  is  sometimes  claimed  that  this  system  is  advanta- 
geous to  shippers,  on  the  ground  that,  by  guaranteeing 
large  and  regular  business  to  the  favored  navigation 
companies,  it  enables  them  to  give  efficient,  regular,  and 
frequent  service.^  But  that  the  system  is  unnecessary 
as  a  means  of  securing  good  and  regular  service  seems  to 
be  indicated  by  the  fact  that  many  conferences  do  not 
employ  it.^  And  it  is  obvious  that  such  a  system  may 
be,  as  it  in  fact  has  been,  so  used  as  to  make  eflfective 
competition  by  outside  lines  very  difficult  and  at  times 
impossible,  and  thus  to  make  shippers  absolutely  depend- 
ent upon  the  conference  lines. ^  For  these  lines,  having 
generally  a  considerable  number  of  vessels  among  them, 
can  so  arrange  the  order  of  sailings  for  the  different  hnes 
as  to  give  a  frequent  service.  An  independent  line, 
endeavoring  to  compete  with  the  others,  cannot  usually 
give,  alone,  an  equally  frequent  service.  Many  shippers 
will  therefore  find  themselves  compelled  to  patronize 
one  or  more  of  the  conference  lines  a  part  of  the  time  ^ 
even  though  the  conference  rates  are  higher,  and  may 

^  Ibid.,  p.  287.  *  Ibid.,  p.  118. 

*  Ibid.,  p.  161.  *IbiJ.,  pp.  161,  162. 

^Ibid.,  p.  307.  'Ibid.,  pp.  163-165. 
'  Ibid.,  p.  165. 


8o   TRANSPORTATION  COSTS  OF  COMMERCE 

conclude  to  patronize  these  lines  all  the  time  and  so 
receive  the  deferred  rebates.  Shippers  may  also  fear 
that  if  they  patronize  a  competing  line  which  cannot 
alone  give  them  all  the  saiHngs  required,  the  other  lines, 
on  which  they  are  in  part  dependent,  will  refuse  abso- 
lutely to  carry  any  of  their  goods.  An  illustration  is 
afforded  by  the  experience  of  the  Lloyd  Braziliero  line, 
an  independent  line  operating  between  Brazil  and  the 
United  States.  This  Hne,  though  charging  rates  of  from 
26  to  32  cents  per  bag  on  coffee  as  compared  to  conference 
rates  of  45  to  50  cents,  was  able  to  carry  the  coffee  of  but 
one  important  shipper  and  only  a  part  of  that.^  This 
company,  Arbuckle  Bros.,  was  refused  the  service  of  the 
conference  lines  and  has  had  to  charter  vessels  for  a  large 
part  of  its  shipments.^  It  now  appears,  however,  that 
such  refusal  to  serve  shippers  may  constitute  restraint  of 
trade  and  be  illegal.^ 

It  can  hardly  be  said  that  business  obtained  by  navi- 
gation companies  in  this  way  is  fairly  earned.  Business 
so  obtained  is  not  the  reward  of  superior  efficiency 
shown  in  better  service  or  lower  rates.  It  is  rather  the 
result  of  combined  efforts  to  shut  out  possible  competi- 
tion ;  it  is  the  result  of  what  is,  in  effect,  a  conspiracy 
against  freedom  of  commerce  and  against  the  general 
well-being. 

Another  method  of  preventing  long-continued  compe- 
tition is  by  the  use  of  so-called  fighting  ships,  i.e.  by 

>Huebner,  Report  on  Steamship  Agreements  and  Affiliations  in  the  American 
Foreign  and  Domestic  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  Vol.  IV, 
igi4,   pp.  165,  166. 

«/Wrf.,  p.  167. 

«  See  United  Slates  v.  Prince  Line,  Limited,  et  al.,  220  Fed.  Rep.,  230,  in  which 
the  court  granted  an  injunction  against  refusal  to  carry  for  any  shipper  at  regular 
rates. 


TRANSPORTATION  MONOPOLY  8i 

collective  competition  against  a  single  outside  line.  The 
conference  lines  buy  or  set  aside  certain  ships  for  this 
purpose.  These  vessels  underbid  the  rates  of  the  out- 
side line  even  though  to  do  so  they  must  carry  at  a  loss, 
and  this  loss  is  borne  jointly  by  ail  the  conference  Unes.^ 
The  would-be  competitor,  however  efficient  its  service 
and  however  low  its  rates,  may  thus  be  driven  out  of  the 
trade.  The  conference  fines  maintain  their  monopoly, 
not  by  superior  service  but  by  making  rival  service 
impossible. 

The  assumption  has  been  frequently  made,  in  the  past, 
that  water  transportation  is  naturally  competitive  and 
so  needs  little  or  no  regulation.  There  has  been,  until 
recently,  comparatively  little  attempt  to  investigate 
combinations  and  agreements  among  water  carriers,  or 
to  interfere  with  them  by  means  of  prosecutions  under 
the  Anti-trust  Law.  Nevertheless,  it  would  appear 
that  the  Anti-trust  Law  appfies  to  such  combinations 
and  agreements  no  less  than  to  similar  arrangements 
between  railroads.  A  combination  of  shipowners, 
which  fixes  rates  of  transportation,  and  which  discrim- 
inates against  shippers  using  other  fines,  so  maintaining 
or  endeavoring  to  maintain  a  monopoly,  has  been 
declared  to  be  illegal.^  A  combination  or  agreement  of 
water  carriers  for  the  control  of  transportation  to  and 
from  the  United  States  is  unlawful  and  void  regardless 
of  where  it  is  made  or  where  it  is  to  be  performed  or  by 
what  vessels  it  is  to  be  carried  out.'    Furthermore,  the 

1  Ibid.,  p.  46  and  pp.  289,  290. 

*  Thomsen  cl  al.  v.  Union  Castle  Mail  S.  S.  Co.  el  al.,  92  C.  C.  A.,  315. 

*  United  Slates  v.  Hamburg- Amerikanische  Packet-Pahrt-Actien-Gesellschaft 
et  al.,  200  Fed.  Rep.,  S06. 

The  Federal  government  recently  brought  suit,  under  the   Sherman   Law, 
against  the  steamship  lines  of  the  North  Atlantic  Conference.     The  government 
alleged  that  there  was  unlawful  combination  for  the  purpose  of  apportioning 
PART  m  —  G 


82    TRANSPORTATION  COSTS   OF  COMMERCE 

Interstate  Commerce  Law  applies  not  only  to  railroad 
rates  but  also  to  rates  charged  for  transportation  "partly 
by  railroad  and  partly  by  water  when  both  are  used  under 
a  common  control,  management,  or  arrangement  for  a 
continuous  carriage  or  shipment,"  though  this  juris- 
diction does  not  extend  to  lines  operating  between  the 
United  States  and  a  non-adjacent  foreign  country,  and 
the  Interstate  Commerce  Commission  is  empowered, 
by  the  amendment  of  1910,  to  establish  through  routes, 
joint  classifications,  and  joint  rates  and  to  prescribe  the 
division  of  such  rates  among  connecting  carriers,  not  only 

traffic  and  fixing  rates  and  that  there  was  a  use  of  "fighting  ships"  for  breaking 
down  competition.  An  injunction  was  asked  for,  prohibiting  the  entrance  or 
clearance  at  any  American  port,  of  any  ship  belonging  to  any  line  in  the  confer- 
ence. The  court  granted  an  injunction  against  the  use  of  "fighting  ships"  but 
refused  to  regard  the  conference  arrangements  as  otherwise  illegal,  contending 
that  the  combination  was  a  necessary  means  of  preventing  cutthroat  competi- 
tion ending  in  monopoly  of  the  strongest  or  in  complete  consolidation,  and  that, 
therefore,  the  combination  did  not  unreasonably  interfere  with  trade.  See 
United  States  v.  Bamhurg-American  S.  S.  Line  et  al.,  216  Fed.  Rep.,  971. 
This  decision  was  unsatisfactory  to  the  government,  and  the  case  was  immedi- 
ately appealed  to  the  Supreme  Court.  See  New  York  World,  Oct.  14,  1914. 
The  comment  may  perhaps  be  fairly  made,  on  this  decision  of  a  district  court, 
that  to  permit  rate  agreements,  in  part  because  of  the  fear  of  complete  consoli- 
dation, impUes  the  belief  that  complete  consolidation  cannot  itself  be  prevented. 
In  any  case,  if  rate  agreements  of  some  kind  are  believed  to  be  reasonable  and 
a  necessary  means  of  avoiding  cutthroat  competition,  it  may  plausibly  be 
contended  that  the  agreed  rates  should  be  subject  to  the  supervision  of  a  govern- 
ment regulating  body. 

A  more  recent  decision  of  the  same  district  court  dismisses  the  government's 
Sherman  Anti-trust  Act  suit  against  the  Prince  line  and  others  comprising  the 
so-called  Brazilian  Steamship  Conference,  and  against  lines  comprising  the  Far 
Eastern  Steamship  Conference.  (See  220  Fed.  Rep.,  230.)  Curiously  enough, 
the  court  found  nothing  inconsistent  with  law  either  in  the  rate  agreements  made 
or  in  the  use  of  deferred  rebates.  It  is  difficult  to  believe  that  the  Supreme  Court 
will  take  a  like  position.  Its  interpretation  of  the  Sherman  law  "with  reason" 
seems  never  to  have  led  it  so  far  as  this  in  the  defense  of  monopoly.  On  the  con- 
trary, it  has  shown  itself,  by  a  long  line  of  decisions,  hostile  to  combinations 
having  monopoly  power.  It  should  be  said,  however,  that  the  district  court 
granted  an  injunction  against  refusal  to  serve  any  shipper  at  the  regular  rates, 
and  intimated  that  an  injunction  would  have  been  granted  against  the  use  of 
"fighting  ships,"  had  evidence  of  such  use  been  presented. 


TRANSPORTATION   MONOPOLY  83 

when  all  are  rail  carriers  but  also  when  one  is  a  carrier  by 
water,  provided  that  such  through  routes,  joint  classifi- 
cations, and  joint  rates  have  not  been  voluntarily  estab- 
lished. Finally,  the  Panama  Canal  Act  of  191 2 
authorizes  the  Interstate  Commerce  Commission  to 
establish  physical  connection  between  rail  and  water 
lines,  when  reasonably  practicable  and  justifiable,  by 
directing  either  line  or  both  to  construct  necessary 
tracks ;  "to  establish  through  routes  and  maximum  joint 
rates  over  such  rail  and  water  lines,  and  to  determine  all 
the  terms  and  conditions  under  which  such  lines  shall  be 
operated  in  the  handling  of  the  traffic  embraced";  and 
"to  establish  maximum  proportional  rates  by  rail  to  and 
from  the  ports  to  which  the  traffic  is  brought,  or  from 
which  it  is  taken  by  the  water  carrier,  and  to  determine  to 
what  traffic  and  in  connection  with  what  vessels  and  upon 
what  terms  and  conditions  such  rates  will  apply."  There 
is,  however,  no  law  regulating  either  the  rates  charged 
or  the  competitive  practices  followed  when  the  trans- 
portation is  wholly  by  water.  Specific  prohibition  of 
the  use  of  "fighting  ships"  and  of  deferred  rebates,  and 
prohibition  of  any  unreasonable  discrimination  would 
be  desirable.^  Effective  regulation  would  probably 
involve,  also,  an  extension  of  the  jurisdiction  of  the  Inter- 
state Commerce  Commission  to  include  transportation 
wholly  by  water. 

§3 

Other  Causes  of  Monopoly  in  Water  Transportation 

Monopoly  control  of  commerce  has  also  been  furthered 
by  "exclusive"  and,  though  to  a  less  extent,  by  "prefcr- 

•  Cf.  Huebner,  Report  on  Steamship  Agreemcnls  and  Affiliations  in  the  American 
Foreign  and  Domestic  Trade,   Vol.  IV,  p.  421. 


84   TRANSPORTATION  COSTS  OF  COMMERCE 

ential"    agreements    between    railway    and    steamship 
companies.     These  agreements  provide  that  the  railroad 
company  and  the  steamship  line  involved  shall  each 
furnish  freight  to  the  other  and  that,  so  far  as  possible, 
all  through  freight  from  either  Une  shall  be  delivered  to 
the  other  line  for  carriage  to  destination.^     Formerly, 
many  of  the  railroads  made  contracts  with  steamship 
Hnes,  which  bound  the  railroads  to  ship  goods  to  certain 
ports,  on  through  bills  of  lading,  only  by  the  steamship 
lines  with  which  the  contracts  were  made,  regardless  of 
the  preferences  of  shippers.     These  were  "exclusive" 
contracts.     But  the  Interstate  Commerce  Commission, 
acting  under  its  general  authority  to  forbid  discriminat- 
ing rates  and  practices,  has  recently  declared  this  land 
of  arrangement   to  be  an  attempt  to  compel  shippers 
to  employ  a  particular  water  line,  and  an  illegal  dis- 
crimination against  shippers.^     It  was  declared  to  be 
illegal  for  a  railroad  to  give  the  use  of  its  facilities  ex- 
clusively   to   one    steamship    line,    unless   the    railroad 
would  undertake  to  deliver  to  other  ship  lines  at  an- 
other wharf  for  the  same  charge.     The  railroad  may 
have  a  preferred  steamship  connection  so  long  as  such 
preference  does  not  involve  any  discrimination  against 
traffic  routed  via  the  railroad  over  a  non-preferred  boat 
line.     "Exclusive"  agreements  have,  therefore,  largely 
given  place  to  "  preferential  "  ones.^ 

Control  of  wharf  space  by  conference  lines,  or  railroads, 
or  both,  is  sometimes  a  barrier  to  the  freest  commerce 


1  Cf.  Huebner,  Report  on  Steamship  Agreements  and  Affiliations  in  the  Ameri- 
can Foreign  and  Domestic  Trade,  Vol.  IV,  p.  292. 

'  See  Interstate  Commerce  Commission  Reports,  XXIII,  pp.  417-428. 
»  Huebner,  Report  on  Steamship  Agreements  and  Affiliations,  p.  240. 


TRANSPORTATION   MONOPOLY  85 

via  a  given  port.  Water  frontage  is  frequently  owned 
to  a  large  extent  by  railroad  interests.  Thus,  the  Lake 
front  in  Chicago,  opposite  the  business  section,  is  occu- 
pied by  the  Illinois  Central  Railroad ;  and  important 
parts  of  the  water  front  in  Buffalo,  N.  Y.,  Cleveland,  0., 
Norfolk,  Va.,  Mobile,  Ala.,  and  Oakland,  Cal.,  are  con- 
trolled by  railroads.^  In  order  that  a  port  should  fulfill 
well  its  commercial  functions,  it  is  important  that  rail 
and  water  lines  should  come  close  together,  and  if  they 
are  to  do  so,  railroads  must  usually  have  some  frontage ; 
but  it  is  claimed  that  they  have  more  than  they  need  for 
this  purpose  and  that  their  holdings  are  a  barrier  in  the 
way  of  water  transportation  which  might  else  be  profit- 
able. "In  many  cases  they  hold  large  tracts  of  unde- 
veloped frontage  which  they  refuse  to  sell  or  lease,  and 
which  are  needed  for  the  construction  of  public  docks."  ^ 
Where  railroads  thus  maintain  monopoly  of  trafBc  which 
would  otherwise  be  shared  with  competing  navigation 
companies,  such  monopoly  must  be  assumed  to  be 
inimical  to  the  development  of  commerce.  At  Pitts- 
burgh, St.  Louis,  and  other  river  points,  the  railroads  hold 
miles  of  frontage  beyond  what  is  required  for  their  own 
terminal  facilities,  which  might  otherwise,  it  is  urged,  be 
acquired  and  used  by  water  lines.^  At  some  ocean  ports, 
the  combined  holdings  of  railroad  and  large  steamship 
companies  have  been  such  that  it  has  been  difficult  for 
tramp  vessels  or  independent  boat  lines  to  obtain  landing 
privileges.^     Where,  as  in  the  case  of  the  port  of  New 

'  Report  of  the  Commissioner  of  Corporations  on  Transportation  by  Water 
in  the  United  States,  Part  I,  p.  155. 

'Final  Report  of  the  National  Waterways  Commission,  igi2,  p.  21. 

»  Report  of  the  Commissioner  of  Corporations  on  Transportation  by  Water  in 
the  United  Stales,  Part  I,  1909,  p.  155. 

*  Ibid.,  p.  156. 


86    TRANSPORTATION  COSTS  OF   COMMERCE 

Orleans,^  there  is  extensive  public  ownership  and  public 
control  of  wharves,  it  is  possible  to  assure  wharf  space 
on  fair  terms  to  all  vessels.  Attention  has  elsewhere  ^ 
been  called  to  the  British  system  of  public  harbor  trusts 
and  its  advantage  for  harbor  management.  Where  a 
harbor  is  controlled  by  such  a  trust,  it  is  easily  possible  to 
avoid  exclusion  of  any  vessels. 

Another  condition  that  has  tended  towards  transporta- 
tion monopoly  has  been  the  large  control  of  water  car- 
riers themselves,  by  American  railroads.'  To  a  very 
considerable  extent  there  has  been  railroad  ownership 
of  vessels  engaged  in  the  Atlantic  Coast  trade,  the  Gulf 
trade,  and  the  Great  Lakes  trade,  vessels  which  might 
otherwise  be  competitors  of  railroads  for  the  traffic 
between  American  ports.  In  very  many  cases,  the  only 
regular  line  of  vessels  carrying  freight  between  two  or 
more  ports  has  been  controlled  by  a  railroad  company 
or  by  a  shipping  consolidation  ^  (frequently  a  holding 
company) .  It  is  now  provided,  however,  by  the  Panama 
Canal  Act  of  191 2,  that  no  railroad  or  other  common 
carrier  subject  to  the  Interstate  Commerce  Act  shall  own, 
lease,  operate,  control,  or  have  any  interest  whatsoever 
(by  stock  ownership,  holding  company,  stockholders  or 
directors  in  common,  or  otherwise) ,  in  any  common  carrier 
by  water,  which  does  or  may  compete  with  it.  The 
Interstate  Commerce  Commission  has  jurisdiction  to 
decide,  in  each  case,  as  to  the  fact  of  possible  competition. 

*  Report  of  the  Commissioner  of  Corporations  on  Transportation  by  Water  in 
the  United  States,  Part  III,  pp.  70-102,  gives  a  full  discussion  of  the  organization 
of  this  port. 

» Part  II,  Chapter  VIII,  §  5. 

'  Report  of  the  Commissioner  of  Corporations  on  Transportation  by  Water  in 
the  United  States,  Part  IV,  on  Control  of  Water  Carriers  by  Railroads  and  Ship- 
ping Consolidations,  191 2,  Chapters  I  and  II. 

*Ibid.,  p.  13. 


TRANSPORTATION   MONOPOLY  87 

§4 

The  Function  of  Government  in  Relation  to  Transporta- 
tion Monopoly 

Monopoly  in  transportation  may  be  reached  by  a 
variety  of  methods  and  is  frequently  secured,  as  we  have 
seen,  by  methods  which  do  not  at  all  signify  superior 
service  or  lower  rates.  However  secured  and  main- 
tained, there  is  danger  that  such  monopoly  will  be  so  used 
as  to  decrease  commerce  and  lessen  the  general  welfare. 
Government  should  prevent,  so  far  as  possible,  the 
attainment  of  monopoly  by  unfair  practices  or  by  con- 
spiracy, or  under  any  circumstances  which  make  it  detri- 
mental to  the  general  welfare;  and,  where  monopoly 
appears,  government  should  protect  commerce  against 
possible  extortion.  Besides  establishing  and  maintaining 
an  adequate  money  and  banking  mechanism,  government 
may  be  said  to  have  at  least  two  important  functions  with 
regard  to  commerce,  a  negative  and  a  positive  one.  The 
negative  function  of  government  is  to  avoid,  itself, 
interfering  with  the  normal  course  of  trade  by  tariff 
restrictions,  bounties,  navigation  acts,  or  other  special 
privileges.  The  positive  function  of  government  is  to 
prevent  interference  with  trade  and  diversion  of  trade  out 
of  its  natural  channels,  by  monopoHstic  or  discriminat- 
ing transportation  rates.  On  the  other  hand,  when  the 
principle  of  rate  regulation  by  government  is  thoroughly 
estabhshed,  care  must  be  taken  not  to  require  rates  so  low 
as  to  discourage  the  investment  of  capital  in  needed 
transportation  facilities,  since  inadequate  facihties,  no 
less  than  high  rates,  may  prevent  the  fullest  profitable 
development  of  trade. 

Properly  to  regulate  the  rates  of  monopolistic  trans- 


88    TRANSPORTATION  COSTS  OF  COMMERCE 

portation  companies  is  a  task  of  considerable  difficulty, 
yet  a  task  which,  through  commissions  or  otherwise, 
government  must  apparently  perform.  What  standards 
of  reasonableness  should  be  applied  when  such  regulation 
is  undertaken?  Provided  transportation  facilities,  e.g. 
a  railroad,  are  needed  for  the  carriage  of  goods  between 
certain  points,  provided  the  route  is  wisely  chosen  and 
the  management  reasonably  good,  the  rates  allowed 
should  yield  enough  to  pay  all  expenses,  to  pay  a  reason- 
able projQt  on  the  cost  of  construction,  or  more  nearly, 
perhaps,  what  the  cost  of  construction  would  now  ^  be, 
if  the  road  had  to  be  built  again,  and  to  pay,  also,  a 
reasonable  rent  on  the  land  used  for  right  of  way  and 
stations.^  Public  regulation  must  allow  reasonable 
profit  to  such  a  company,  else  investors  will  prefer  to 
devote  their  capital  to  other  uses.  And  unless  the 
profit  allowed,  above  interest  on  the  construction  cost, 
amounts  to  as  great  a  surplus  as  the  necessary  land  space 
would  yield  in  some  other  use,  the  application  of  land  to 
the  requirements  of  transportation  will  be  discouraged. 
If  increased  population  adds  to  the  returns  which  the 
land  would  yield  in  some  other  use,  it  should  ordinarily 
add  to  the  returns  which  the  same  land  yields  when 
devoted  to  the  transportation  use.  These  larger  returns 
will  usually  be  yielded  without  the  necessity  of  rate 
increases  or,  in  some  cases,  even  though  rates  fall,  since 
growth  of  population  tends  to  increase  traffic.  But  to 
force  rate  reduction  to  such  a  point  as  to  prevent  the 

>  If  values  change,  this  cost  of  duplication  should  be  emphasized  in  so  far  as 
it  would  have  influence  in  purely  competitive  businesses  of  large  plants.  In  such 
a  business,  the  existing  prices  are  dependent  largely  on  past  cost  of  construction, 
for  if  that  was  very  great,  there  will  be  fewer  plants  now  in  operation.  But  a 
decrease  in  the  necessary  cost  of  construction  is  likely  to  encourage  the  building 
of  new  plants,  whose  competition  will  soon  influence  prices. 

«  Cf.  Chapter  I  (of  Part  III),  §  3. 


TRANSPORTATION   MONOPOLY  89 

realization  of  any  gain,  on  the  theory  that  the  gain  is 
unearned,  is  to  discriminate  unduly  against  the  owners 
of  land  used  for  the  purpose  of  transportation.  It  is 
not  intended  to  argue  that  increases  in  the  rental  value 
of  land  should  go  to  private  individuals  or  to  corpora- 
tions rather  than  to  the  public.  To  tax  these  in- 
creases heavily  wherever  they  occur  may  be  a  desirable 
economic  policy.  Where  this  policy  is  followed,  the 
owners  of  any  land  will  be  as  careful  as  now  to  use  it 
in  the  way  that  brings  the  largest  gain,  since  the  tax, 
being  based  on  the  natural  and  situation  advantages  of 
the  land,  will  be  the  same  regardless  of  how  these  owners 
choose  to  use  it.^  But  to  rule  that  if  the  land  is  used  for 
most  purposes,  such  a  gain  in  value  will  be  allowed  to 
accrue  to  its  owners ;  while  if  it  is  used  for  one  particular 
purpose,  this  gain  shall  go  to  the  pubHc,  is  to  encourage 
the  other  uses  and  discourage  the  one  use. 

On  the  other  hand,  government  is  not  under  obligation 
so  to  regulate  rates  as  to  protect  a  transportation  com- 
pany even  in  the  enjoyment  of  profits  only  equal  to  the 
average  in  competitive  business,  when  this  company  has 
been  mismanaged. ^  Companies  engaged  in  strictly 
competitive  business  do  not  enjoy  average  profits 
unless  managed  with  average  ability.  Nor  is  a  railroad 
between  two  points,  which  has  been  laid  out  over  an 
unnecessarily  devious,  and,  therefore,  a  relatively  un- 
profitable, route,  entitled  to  charge,  in  consequence, 
higher  rates  on  traffic  between  those  points,  so  as  to  make 

1  If  the  tax  were  made  higher  just  because  the  owner  chose  to  make  a  more 
profitable  use  of  the  land  than  others  had  seen  the  possibility  of,  the  best  use  of 
land  would  be  discouraged.  Cf.  Marshall,  Principles  of  Economics,  6th  edition, 
London  (Macmillan),  igio,  p.  434. 

*  See  views  of  the  Interstate  Commerce  Commission,  as  set  forth  in  the  "  Five 
Per  Cent  case,"  Interstate  Commerce  Commission  Reports,  Vol.  XXXI,  pp. 
358,  359  (PP-  351-454  for  entire  case). 


90    TRANSPORTATION  COSTS  OF  COMMERCE 

as  great  profits,  at  the  expense  of  the  public,  as  if  it  had 
been  wisely  located.^  The  same  conclusion  may  of  course 
follow  if  the  route  chosen  can  provide  little  intermediate 
traffic,  and  if  a  more  profitable  route,  providing  more 
intermediate  traffic,  was  available.  In  competitive 
business,  owners  are  obliged  to  suffer  diminution  of 
profits  when  mistakes  are  made.  Where  there  is  real 
competition  between  several  railroad  companies,  the  un- 
wisely located  fine  finds  itself  at  a  serious  disadvantage. 
Any  combination  or  agreement  which  should  insure  to 
such  a  fine  a  profit  as  great  as  it  could  have  expected  if 
well  located  would  be  inimical  to  public  welfare.  Of 
course  a  railroad  built  where  traffic  is  light,  provided 
it  was  built  so  as  to  connect,  by  the  best  available 
route,  the  principal  points  served,  is  fairly  entitled  to 
charge  the  high  rates  necessary  to  secure  a  reasonable 
profit. 

Competition  stimulates  to  good  management.  Public 
regulation  of  a  business  which  is,  by  necessity,  a  partial 
monopoly,  perhaps  may  not,  at  best,  stimulate  efficiency 
as  much.  But  unless  regulation  is  so  applied  as  to  make 
profits  depend  in  part  on  good  management,  such  man- 
agement is  Hkely  to  be  had  to  a  decreasing  degree,  rates 
are  likely  to  be  high,  and  commerce  to  be  retarded.  Yet 
it  would  not  be  fair  to  require,  as  a  condition  precedent 
to  allowing  reasonable  profits,  a  standard  of  management 
far  superior  to  that  common  in  other  industries.  Rea- 
sonably good  management  should  bring  reasonably  good 
returns,  and  exceptional  management  should  bring 
returns  above  the  average.     The  Interstate  Commerce 

•  Cf .  views  of  the  Interstate  Commerce  Commission,  as  set  forth  in  the  "  Five 
Per  Cent  case,"  Interstate  Commerce  Commission  Reports,  Vol.  XXXI, 
P-  359- 


TRANSPORTATION   MONOPOLY  91 

Commission  has  said  :  ^  "A  premium  must  be  put  upon 
efficiency  in  the  operation  of  the  American  railroad. 
Rates  cannot  be  increased  with  each  new  demand  of 
labor,  or  because  of  wasteful,  corrupt,  or  indifferent 
management.  Nor  should  rates  be  reduced  with  each 
succeeding  improvement  in  method.  Society  should 
not  take  from  the  wisely  managed  railroad  the  benefits 
which  flow  from  the  foresight,  skill,  and  planned  cooper- 
ation of  its  working  force.  We  may  ruin  our  railroads 
by  permitting  them  to  impose  each  new  burden  of  obHga- 
tion  upon  the  shipper.  And  we  can  make  no  less  sure 
of  their  economic  destruction  by  taking  from  them  what 
is  theirs  by  right  of  efficiency  of  operation  —  the  elimina- 
tion of  false  motion,  of  unneeded  effort,  and  the  conser- 
vation of  labor  and  materials.  The  standard  of  rates 
must  be  so  high  that  the  needed  carrier  which  serves  its 
public  with  honesty  and  reasonable  effort  may  live.  And 
yet  rates  should  be  still  so  much  below  the  possible  maxi- 
mum as  to  give  high  and  exceptional  reward  to  the 
especially  capable  management,  the  well-coordinated 
force  and  plant.  This  is  the  ideal,  unrealizable  perhaps, 
but  it  points  the  way." 

In  the  fixing  of  rates,  the  par  value  of  stocks  and  bonds 
of  a  company  may  be  a  consideration  of  importance  as 
indicating  original  investment.  But  where  stock  water- 
ing has  been  attempted,  par  value  has  no  significance. 
Market  value  of  securities  cannot  be  regarded  as  a  satis- 
factory standard  for  rate  fixing,  since  market  value 
depends  mainly  on  profits,  which  in  turn  depend  chiefly 
on  rates.  Even  if  the  original  investment  can  be  ascer- 
tained, changes  in  values,  particularly  in  regard  to  land, 

1  Ibid.,  Vol.  XX,  p.  334  (pp.  307-399  for  entire  case).  Cf.  Vol.  XXXI,  p.  358 
(in  the  "Five  Per  Cent  case,"  pp.  351-454). 


92    TRANSPORTATION  COSTS  OF  COMMERCE 

may  make  this  original  investment  an  unsatisfactory 
measure  of  present  physical  value. ^  A  physical  valuation 
of  transportation  plant,  such  as  the  Interstate  Commerce 
Commission  is  now  carrying  out^  for  railroads  of  the 
United  States,  may  provide  an  important  standard  by 
which  to  judge  profits  and  rates. 

§5 
Summary 

In  this  chapter  we  have  seen  that  railroads  are  partial 
monopohes  in  that  there  are  almost  always  intermediate 
points  served  by  only  one  line.  As  to  points  served  by 
more  than  one  line,  we  have  seen  that  formal  rate  agree- 
ments and  pooling  agreements  have  been  common  among 
competing  railways,  but  that  such  agreements  are  now 
illegal.  Competition  among  railways  may  be  ruinous 
to  the  competing  companies  if  facilities  are  in  excess  of 
possible  business,  but  is  not  otherwise  necessarily  so. 

Transportation  on  the  ocean  is,  by  virtue  of  the  fact 
that  a  route  does  not  have  to  be  constructed,  less  sub- 

>  In  Smyth  v.  Ames,  169  U.  S.,  466,  the  Supreme  Court  has  laid  down  as  fol- 
lows the  matters  to  be  considered  (see  particularly  p.  455) :  "We  hold,  however, 
that  the  basis  of  all  calculations  as  to  the  reasonableness  of  rates  to  be  charged 
by  a  corporation  maintaining  a  highway  under  legislative  sanction  must  be  the 
fair  value  of  the  property  being  used  by  it  for  the  convenience  of  the  public. 
And,  in  order  to  ascertain  that  value,  the  original  cost  of  construction,  the  amount 
expended  in  permanent  improvements,  the  amount  and  market  value  of  its 
bonds  and  stocks,  the  present  as  compared  with  the  original  cost  of  construction, 
the  probable  earning  capacity  of  the  property  under  particular  rates  prescribed 
by  statute,  and  the  sum  required  to  meet  operating  expenses  are  all  matters  for 
consideration,  and  are  to  be  given  such  weight  as  may  be  just  and  right  in  each 
case.  We  do  not  say  that  there  may  not  be  other  matters  to  be  regarded  in 
estimating  the  value  of  the  property."  That  the  Supreme  Court  would  be 
inclined,  however,  to  put  chief  emphasis  on  a  physical  valuation,  seems  to  be 
indicated  by  its  discussion  in  the  recent  Minnesota  Rate  case,  230  U.  S.,  352. 

*  By  an  Act  of  March  i,  1913. 


TRANSPORTATION  MONOPOLY  93 

ject  to  monopoly  control  than  rail  transportation.  But 
agreements  among  water  carriers  have  been  common,  and 
the  field  of  competition  has  been  thus  considerably 
limited.  Furthermore,  various  devices,  such  as  deferred 
rebates  and  fighting  ships,  have  been  adopted  to  destroy 
the  competition  of  independent  lines.  Exclusive  ar- 
rangements with  railways,  and  control  of  wharf  space 
by  conference  lines  and  by  railways,  have  also  served  to 
make  independent  competition  difficult. 

Monopolistic  rates,  like  protective  tariffs,  may  serve 
to  interfere  with  commerce  which  ought,  for  the  general 
economic  welfare,  to  take  place.  As  government  should 
itself  avoid  undue  interference  with  commerce  through 
the  establishment  of  protective  tariffs,  bounties,  naviga- 
tion acts,  or  other  special  favors,  so  also  it  should  prevent, 
directly  or  indirectly,  any  economically  injurious  inter- 
ference with  commerce,  which  private  interests  might 
occasion  through  the  charging  of  monopolistic  trans- 
portation rates.  Yet  in  thus  protecting  commerce 
against  the  exactions  of  private  monopoly,  government 
regulation  must  avoid  enforcing  rates  so  low  that  capital 
will  not  be  forthcoming  for  transportation  requirements. 
The  rates  fixed  should  be  such  as  will  yield,  with  reason- 
ably good  management,  the  average  rate  of  return  on 
capital  invested  in  construction,  and  a  fair  return  or  rent 
on  the  land  requisite  for  way  and  terminals. 


CHAPTER  IV 

Economically  Undesirable  Rate  Discrimination 
AMONG  Places 


Competition  as  a  Cause  of  Discrimination  among  Places 

Discrimination  in  rates,  among  places,  is  chiefly  due 
to  the  existence  of  effective  competition  among  trans- 
portation companies  at  some  places  and  not  at  others. 
Thus,  two,  three,  or  more  railroads  may  connect  A  and 
C,  while  B  is  on  the  line  of  only  one.     (See  figure  8.) 


Figure  8 


Competition  among  the  several  railroads  for  trafi&c 
from  A  to  C  and  from  C  to  ^  will  make  rates  on  this 
traffic  low,  while  the  absence  of  competition  for  the 
shorter  distance  traffic  will  make  rates  from  A  to  B, 
B  to  A,  B  to  C,  and  C  to  B  comparatively  high  in  pro- 
portion to  service  rendered  (or  distance  the  goods  are 
carried). 

94 


UNDESIRABLE   PLACE   DISCRIMINATION     95 

The  competition  which  introduces  this  inequality  of 
rates  need  not  be  competition  of  routes.  It  may  also 
be  competition  of  directions,  competition  of  locations, 
or  even  competition  with  local  self-sufficiency.^  Con- 
sider one  of  our  illustrations  of  competition  of  directions, 
in  a  previous  chapter,  where  we  assumed  the  railroad 
AC  (see  figure  9)  to  make  a  low  rate  on  coal  from  A  to 


*^oooooooooo^ 
Figure  9 

C,  in  order  to  prevent  the  coal  produced  at  A  from  being 
shipped  almost  entirely  over  the  line  AB.  In  this  illus- 
tration, the  railroad  ACis  not  compelled  by  competition 
of  directions  to  make  low  rates  from  A  to  G,  for  G  can- 
not secure  coal  over  any  other  railroad  ;  or  from  F  to  G, 
or  from  F  to  C,  for  F  has  not  the  choice  of  shipping  over 
another  line.  These  intermediate  rates  may  therefore 
be  appreciably  higher,  in  relation  to  the  distance  the 
intermediate  traffic  is  carried. 

In  the  case  of  competition  of  locations,  also,  all  points 
are  not  equally  benefited.  Thus,  though  the  line  EDA 
(see  figure  10)  makes  low  rates  on  goods  carried  from 

1  See  Chapter  II  (of  Part  HI),  §§  i,  3.  4.  5- 


96    TRANSPORTATION  COSTS  OF   COMMERCE 

D  to  A,  lest  certain  industries  be  located  entirely  at  B 
instead  of  partly  at  D,  it  may  not  need  to  make  corre- 
spondingly low  rates  from  D  to  F.  For  in  F  the  pro- 
ducers at  D  do  not  feel  to  the  same  extent  as  in  ^,  the 
competition  of  their  rivals  at  B.  High  railroad  rates 
from  D  to  F  may  be  shifted  upon  the  consumers  at  F, 
in  the  prices  of  the  goods  carried.  The  burden  of  high 
rates  to  A,  however,  must  fall  upon  the  producers  at  D 


Figure  io 


and  may  cause  them  to  abandon  the  market  and,  per- 
haps, the  business.  In  any  case,  it  is  likely  to  decrease 
the  traffic  of  railroad  EDA .  Hence,  lower  rates  may  be 
made  by  the  railroad  on  traffic  to  A  than  on  traffic  to  F. 
If  the  competition  is  with  local  self-sufficiency,  there  is 
a  like  reason  for  discrimination.     A  railroad  connecting 

B 

k^ ^^ *  C 

Figure  ii 

A  (see  figure  ii),  a  center  of  coal  production,  with  C, 
where   coal   could   be   mined   somewhat  less  advanta- 


UNDESIRABLE   PLACE   DISCRIMINATION     97 

geously,  may  make  a  low  rate  on  coal  from  A  to  C,  as 
the  only  way  to  get  the  traffic.  But  it  will  not  be 
under  similar  compulsion  to  make  an  equally  low  rate 
from  A  to  B. 

Discrimination  between  places  occurs  in  water  trans- 
portation also.  At  one  time  the  White  Star  Line  carried 
goods  from  New  York  via  Liverpool  to  Australia  at 
rates  30  per  cent,  lower  than  the  rates  charged  on  the 
same  kinds  of  goods  carried  on  the  same  vessels  from 
Liverpool  to  Australia.  This  was  due  to  competition 
for  the  through  business,  with  the  direct  lines  from  the 
United  States.^ 

§  2 

Economic   Loss  which  May  Flow  from   Discrimination 
among  Places 

Let  us  now  consider  the  effects,  on  all  interests  con- 
cerned, and  on  general  community  welfare,  of  discrimi- 

c 


Figure  12 

nation  among  places,  as  it  has  been  very  generally 
practiced  by  transportation  companies.  We  may  begin 
with  place  discrimination  caused  by  competition  of  two 

>  Huebncr,  Report  on  Steamship  Af::rirmcnts  and  Afilialions  in  the  American 
Foreign  and  Domestic  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  igi4,  Vol. 
IV.,  p.  106. 

PART  ni  —  H 


98    TRANSPORTATION   COSTS  OF   COMMERCE 

or  more  railroads  with  each  other.  Suppose  two  roads 
joining  the  cities  A  and  B  (see  figure  12),  C  being  a 
town  or  city  on  one  of  the  roads  only,  and  D  a  town  or 
city  on  the  other.  Competition  makes  rates  from  A  to 
B  lower  than  from  C  to  B  and  lower  than  from  D  to  B. 
Looking  at  this  discrimination  from  the  standpoint  of 
either  road  and  the  constituency  it  serves,  and  assuming 
conditions  to  be  fixed  for  this  road  by  the  policy  of  the 
other,  the  discrimination  seems  to  be  entirely  justifiable. 
If  C  complains  of  injustice  in  the  rates  charged,  say, 
from  C  to  5  as  compared  with  the  rates  from  A  to  B,  the 
railroad  ACB  has  a  ready  answer.  It  is  compelled  to 
make  a  low  rate  from  A  to  B  and  vice  versa,  because  of 
the  competition  of  the  line  ADB,  or  forego  all  traffic 
between  those  points.  Yet  this  traffic  pays  the  terminal 
expenses  involved  and  the  necessary  expenses  for  the 
production  of  train  mileage.  It  leaves,  also,  we  must 
suppose,  some  small  surplus  to  apply  towards  the  general 
expenses,  if  not  towards  fijced  charges  or  profits.  Other- 
wise, it  would  not  be  worth  competing  for.  Had  it 
been  supposed  that  the  railroad  ACB  was  not  to  be 
allowed  to  seek  a  share  of  this  traffic,  which,  in  the  sense 
noted,  is  paying  traffic,  the  railroad  might  never  have 
been  built.  It  has  been  built,  and,  therefore,  is  able  to 
serve  C  also,  only,  perhaps,  because  of  the  competitive 
traffic  of  which  it  secures  a  part.  Without  this  traffic 
it  would  not  even  pay  to  continue  business,  so,  probably, 
only  partially  utiHzing  the  plant,  unless  the  traffic  to 
and  from  C,  together  with  other  intermediate  traffic, 
could  pay  high  enough  charges  to  cover  all  general  ex- 
penses and  something  over.  On  the  other  hand,  to 
charge  rates  on  traffic  to  and  from  C,  and  on  other  in- 
termediate traffic,  as  low  accordingly  as  on  traffic  which 


UNDESIRABLE   PLACE   DISCRIMINATION     99 

is  competitive,  would  probably  mean  lack  of  fair  profit 
and,  conceivably,  even  abandonment.  The  conclusion 
is  drawn,  then,  that  all  these  parties  concerned  really 
benefit  by  the  discrimination.  A  and  B  get  low  rates. 
The  line  ACB  gets  traffic  which  helps  it  to  meet  general 
expenses  and  to  pay  interest  and  dividends.  C  gets  the 
service  of  the  line  ACB,  which  it  could  not  get,  or 
could  not  get  at  such  low  rates,  if  ACB  were  prevented 
from  securing,  even  at  relatively  discriminating  rates, 
the  longer  distance  business. 

The  above  is  essentially  the  argument  usually  pre- 
sented to  justify  discrimination  between  places.  But 
this  argument  leaves  certain  important  facts  out  of 
account.  To  begin  with,  the  reason  why  the  traffic 
from  ^  to  5  is  carried  at  low  rates  is  only  because  there 
happen  to  be  two  fines  serving  A  and  B  as  compared 
with  one  fine  each  serving  C  and  D  respectively,  and  not 
necessarily  because  the  cities  A  and  B  are  naturally 
any  better  located  for  business  than  C  and  D}  When 
we  come  to  consider  the  matter  of  utifization  of  both 
roads,  we  do  not  find  that  the  discrimination  increases 
it.  The  low  rates  from  A  to  B  are  not  made  because 
the  total  traffic  between  those  points  will  decrease  if 
they  are  not  made ;  they  are  not  due  to  the  fear  that  the 
traffic,  as  a  whole,  can  bear  no  higher  rates  without  being 
destroyed.  On  the  contrary,  each  road  makes  these  low 
rates  in  the  fear  that  otherwise  its  traffic  will  decrease 
to  the  profit  of  the  competing  road,  in  the  fear  that  the 
traffic  between  A  and  B  cannot  bear  higher  rates  without 
being  diverted.    As  regards  the  effect  of  low  rates  on 

•  Though,  of  course,  the  larger  populations  of  A  and  B,  if  those  were  relatively 
large  cities  before  the  building  of  the  roads,  may  have  been  a  reason  why  more 
than  one  company  sought  entrance  to  them. 


loo    TRANSPORTATION   COSTS  OF  COMMERCE 

total  traffic,  it  is  entirely  possible  that  a  reduction  of 
rates  in  favor  of  C  would  increase  traffic  to  and  from  C, 
fully  as  much  as  reduction  between  A  and  B  increases 
the  total  traffic  from  A  to  B  and  B  to  A.  As  far,  then, 
as  the  matter  of  complete  utilization  of  existing  railroad 
plants  is  concerned,  there  is  Httle  if  any  more  reason  — • 
perhaps,  sometimes,  less  reason  —  for  reducing  the  AB 
rates,  than  for  reducing  the  AC  and  the  CB,  the  AD 
and  the  DB,  rates.  The  AB  rates  are  reduced  only 
because  each  road  wants  its  facihties  fully  utiUzed,  if 
possible,  even  at  the  expense  of  the  other,  and  not  be- 
cause the  reduction  is  Ukely  so  to  increase  traffic  as 
more  fully  to  utilize  the  facilities  of  both.  As  regards 
this  phase  of  the  economic  results,  there  is  no  special 
gain  from  the  discrimination,  as  such,  whatever  gain 
might  result  from  an  all-around  rate  reduction.  It  is 
true  that  up  to  the  point  of  full  utihzation  of  plant,  rail- 
roads are  operated  under  the  principle  of  increasing 
returns,  that  up  to  that  point,  large  traffic  is  carried 
proportionally  more  cheaply  than  small  traffic,  and  that, 
therefore,  large  traffic,  bringing  this  full  utilization,  is 
desirable.  But  it  is  also  true  that  complete  utilization 
of  all  existing  plant,  i.e.  of  both  railroads,  will  probably, 
in  the  circumstances  under  discussion,  be  no  more 
furthered  by  low  competitive  rates  than  by  low  non- 
competitive rates.  There  is  no  additional  economy  in 
utilization,  resulting  from  discrimination  as  such. 

Since  the  competition  of  the  two  railroads,  and  the 
consequent  discrimination,  favors  A  and  B  at  the 
expense  of  C  and  D,  it  results  that  A  and  B  develop 
more  rapidly  than  their  natural  advantages  would  seem 
to  warrant ;  while  C  and  D  develop  less  rapidly,  have 
their  development  retarded,  or  are  even  made  to  decline 


UNDESIRABLE   PLACE   DISCRIMINATION    loi 

in  industry,  wealth,  and  population,  by  the  disadvantages 
to  which  they  are  thus  subjected.  If  no  rate  differences 
were  made,  other  than  those  compelled  by  differences 
in  actual  cost,  i.e.  if  the  distance  principle  were,  in 
situations  like  the  one  here  discussed,  consistently  ap- 
pUed,  then  the  places  naturally  favored  would  be  the 
ones  to  develop,  rather  than  those  favored  by  the  fact 
—  sometimes,  in  a  sense,  the  accident  —  of  being  served 
by  two  or  more  railroads.  Discrimination  many  times 
deprives  cities  or  districts  of  the  benefits  which  would 
result  to  them  from  their  natural  advantages.  In  so 
far  as  it  actually  does  this,  and  tends  to  develop  industry 
where  the  natural  advantages  of  industry  are  less  good, 
it  lessens  the  wealth-producing  power  and,  consequently, 
the  prosperity,  of  the  country.  It  prevents  the  develop- 
ment of  industry  where  it  should  develop,  and  encour- 
ages its  development  where  it  should  not.  It  may  not, 
like  a  protective  tariff,  divert  effort  into  relatively  un- 
profitable lines  of  production ;  but  is  more  likely  to 
cause  those  lines  of  production  which  would  in  any 
case  be  chosen,  to  be  carried  on  in  relatively  disad- 
vantageous localities.  Rate  discrimination  between 
places  resembles  protection,  to  some  extent,  in  that  it 
may  benefit  some  localities  of  the  country  at  the  expense 
of  others.^ 

This  discrimination  may  also  bring  about  undesirable 
or  uneconomical  transportation.  There  may,  for  in- 
stance, be  industries  for  which  C  has  as  great  advantages 
as  ^ ,  or  even  greater  advantages,  the  products  of  which 
are  marketed  largely  in  B  ;  yet  discrimination  in  rates 
causes  these  industries  to  be  located  at  A.  The  conse- 
quence is  that  goods  have  to  be  carried  from  A  to  B, 

«  Cf.  Part  II,  Chapter  V,  §  6. 


TTXT H/ l.iT> OTT-vr    /~>T->    OUT  rT>r\Tf^ry  , 


I02    TRANSPORTATION  COSTS  OF  COMMERCE 

over  a  comparatively  long  distance,  which  might  be 
carried  from  C  to  5,  a  relatively  short  distance.  More 
labor  has  to  be  expended  that  the  community  may 
attain  a  given  result.  In  this  possible  consequence, 
also,  discrimination  between  places  resembles  the  pro- 
tective tariff.  The  same  objections  apply  if  the  dis- 
crimination between  places  is  caused  by  competition  of 
directions  or  competition  of  locations.  The  existing  le- 
gal Hmitation  and  prohibition  of  discrimination  between 
places  tends  to  raise,  in  this  regard,  the  plane  of  com- 
petition, and  would  seem,  therefore,  to  be  justified.  Sec- 
tion 4  of  the  Interstate  Commerce  Law  prohibits  a 
greater  charge  for  a  shorter  distance  than  for  a  longer 
one  over  the  same  line  in  the  same  direction  when  the 
shorter  distance  is  included  in  the  longer,  except  by 
permission  of  the  Interstate  Commerce  Commission; 
while  section  3  prohibits  any  undue  discrimination 
between  places.  What  is  undue  discrimination  in  any 
specific  case,  where  there  is  complaint  or  where  investi- 
gation is  made,  is  decided  by  the  Commission. 

Complete  prohibition  of  discrimination  among  places 
(except  under  special  circumstances  to  be  discussed  in 
the  next  chapter)  does  away  with  the  economic  wastes 
above  discussed  and  is,  in  so  far,  economically  desirable. 
But  in  some  cases  its  enforcement  may  involve  consider- 
able hardship  to  the  railroads  affected.  If  the  rivalry 
of  these  railroads  to  secure  the  competitive  traffic  is 
keen  and  if  this  competitive  traffic  is  important,  the 
competing  railroads  may  feel  obliged  to  make  corre- 
spondingly low  rates  on  their  intermediate  traffic  —  when 
forbidden  to  discriminate  —  instead  of  venturing  to 
correct  the  discrimination,  in  part,  by  raising  rates  on 
the  longer  distance  traffic.     Such  a  situation  might  mean 


UNDESIRABLE   PLACE   DISCRIMINATION    103 

that  the  general  level  of  rates  would  be  unremunerative, 
that  profits  could  not  be  had,  perhaps  that  fixed  charges 
could  not  be  paid.  It  might  be  well,  therefore,  if  Con- 
gress would  legahze  rate  agreements  and  pooling,  when 
consented  to  and  supervised  by  the  Interstate  Commerce 
Commission,  so  that  cases  of  this  sort  could  be  settled 
with  entire  fairness  and  common  sense.  But  it  should 
not  be  forgotten  that  in  very  many  cases  the  trajfic 
which  is  not  directly  competitive  is  an  important  part 
of  the  whole,  that  the  railroads  concerned  would  not  be 
willing  greatly  to  lower  their  rates  on  it,  even  though 
compelled  not  to  discriminate,  but  that  they  would 
prefer,  each,  to  risk  the  loss  of  some  competitive  traffic, 
by  maintaining  their  rates  on  that  traffic.  All  of  them 
would  probably  continue  to  get,  therefore,  a  share  of 
the  competitive  traffic.  In  such  cases,  at  least,  it  is 
not  necessary  to  legaUze  pooling  in  order  to  enforce 
equahty  of  treatment  without  great  injury  to  the  rail- 
roads. Nor  is  pooHng  a  necessary  measure  when  traffic 
is  sufficient  to  tax  all  the  roads.  As  a  matter  of  actual 
practice,  we  do  not  allow  pooUng  or  formal  rate  agree- 
ments, and  we  do,  not  altogether  unsuccessfully,  pro- 
hibit rate  discrimination. 

§3 

The  Uneconomy  of  Discrimination  either  in  Favor  of  or 
against  Imports 

A  special  class  of  discriminations,  to  which  these 
objections  would  apply,  is  that  of  discriminations  by 
railroads,  in  connection  sometimes  with  navigation  lines, 
against  domestic  and  in  favor  of  imported  goods.  In  a 
case  brought  before  the  Interstate  Commerce  Commis- 


104    TRANSPORTATION  COSTS  OF  COMMERCE 

sion,  in  1905-1907/  it  appeared  that  there  was  rate  dis- 
crimination against  domestic  plate  glass  and  in  favor  of 
the  imported  product.  On  the  domestic  product,  in 
trunk-Une  territory,  third-class  rates  applied,  whereas 
shipments  from  foreign  producing  points  via  American 
ports  and  thence  to  interior  towns  and  cities  were  given 
fourth-  and  fifth-class,  and  even  lower,  rates.  It  was 
complained,  for  example,  that  plate  glass  could  go  from 
Antwerp,  Belgium,  to  Chicago,  by  way  of  Boston  and 
the  New  York,  New  Haven  and  Hartford  Railroad,  at 
40  cents  a  hundred  pounds  for  the  entire  distance,  or 
(as  assumed  by  the  Interstate  Commerce  Commission) 
30  cents  for  the  share  of  the  railroads,  as  compared  with 
a  rate  of  50  cents  a  hundred  pounds  on  domestic  plate 
glass  from  Boston  to  Chicago.  Between  Antwerp  and 
Chicago,  via  New  Orleans  and  the  Illinois  Central  Rail- 
road, 5200  miles,  the  entire  rate  was  32  cents,  or  about 
22  cents  for  the  rail  part  of  the  haul,  as  compared  with 
75  cents  asserted  to  be  the  rate  from  New  Orleans  to 
Chicago  on  the  domestic  product.  These  differences 
were  presumably  due  to  competition,  the  railroads  com- 
peting, in  connection  with  the  ocean  carriers,  for  the 
carriage  of  the  foreign  glass,  which  might  come  by  way 
of  any  port,  but  competing  apparently  much  less  for 
the  traffic  from  one  point  to  another  within  the  coun- 
try, which  had  a  more  limited  choice  of  routes.^ 

The  effect  of  such  discrimination,  in  general,  whatever 
its  effect  might  have  been  in  this  particular  case,  must 
be  to  discourage  home  production,  and,  therefore,  to 
turn  industry  away  from  a  fine  which  it  would,  perhaps, 

1  Interstate  Commerce  Commission  Reports,  Vol.  XIII,  pp.  87-102.  Cf.  an 
earlier  case  in  Interstate  Commerce  Commission  Reports,  Vol.  IV,  pp.  447-534- 

2  At  the  time  this  complaint  was  brought,  the  Interstate  Commerce  Com- 
mission did  not  have  its  present  power  to  prevent  or  correct  such  discriminations. 


UNDESIRABLE   PLACE   DISCRIMINATION    105 

naturally  follow.  May  not  this  be  as  greatly  uneco- 
nomical as  the  policy  of  the  protective  tariff?  If  goods 
can  really  be  produced  more  cheaply  abroad  than  in  the 
United  States,  including  cost  of  transportation,  it  is 
more  profitable  for  us  to  buy  such  goods  abroad  than 
to  produce  them  here,  but  the  same  conclusion  does  not 
follow  if  home  production  is  made  more  expensive  to 
consumers  because  of  an  artificial  barrier  raised  against 
the  home-produced  article.^ 

Let  us  note,  specifically,  the  influence  of  such  dis- 
crimination upon  the  different  interests  concerned. 
The  railroads,  taken  as  a  whole,  have  no  more  to  gain 
from  traffic  in  plate  glass,  or  other  goods,  produced 
abroad,  than  from  the  same  trafiic  originating  on  the 
boundaries  of  our  own  country,  or  even  than  from 
traffic  originating  farther  inland,  if  the  rate  pays  as  large 
a  surplus  above  the  incident  cost.  Each  company 
lowers  rates  on  the  imported  product  only  to  divert 
traffic  from  a  rival  or  to  keep  traffiic  which  otherwise 
might  be  diverted  to  rivals.  Taking  the  roads  as  a 
whole,  it  is  not  to  be  assumed  that  low  rates  on  im- 
ported goods  increase  the  quantity  of  goods  they  carry, 
any  more  than  would  correspondingly  ^  low  rates  on  the 
same  goods  produced  in  the  United  States. 

From  the  point  of  view  of  domestic  producers,  the 
discriminating  rates  are  a  discouragement.  From  the 
point   of  view   of   domestic   consumers,  —  in   the   case 


*  In  this  particular  case,  the  artificial  barrier  was  a  partial  offset  against  tariff 
protection.  We  shall  deal  here,  however,  with  the  rate  discrimination  considered 
by  itself. 

'  By  correspondingly  low  rates  is  here  meant  not  necessarily  rates  the  same 
per  mile  regardless  of  distance,  but  rates  which,  for  the  same  amount  of  goods 
carried,  would  yield  the  same  surplus  for  general  expenses,  fixed  charges,  and 
profits,  above  the  special  additional  cost  of  carrying  the  goods. 


io6    TRANSPORTATION  COSTS  OF  COMMERCE 

cited,  buyers  of  plate  glass,  e.g.  at  Chicago,  —  the  im- 
portant point  is  that  the  glass  should  be  procurable  at 
the  lowest  possible  price.  They  do  not  care  where  it 
comes  from  so  long  as  price  and  quality  are  satisfactory. 
If  the  railroads  make  unduly  low  rates  on  the  imported 
product,  domestic  consumers  gain  no  more  than  the 
raikoads  sacrifice.  If  American  producers,  without  the 
discrimination  to  contend  against,  could  undersell  their 
foreign  rivals,  in  the  Chicago  market,  then  the  reduction 
in  the  rate  on  the  imported  goods  would  cause  a  decrease 
of  revenues  to  the  railroads,  but  no  gain  to  consumers 
until  it  brought  the  foreign  product  below  the  domestic 
in  price.  The  railroads  must  lose,  therefore,  more  than 
the  consumers  gain;  or,  if  non-discriminating  rates 
would  enable  domestic  producers  to  realize  a  higher 
price,  then  the  railroads  and  domestic  producers  must 
lose  more  than  domestic  consumers  gain.  It  cannot 
be  said  that  the  railroads  are  compensated  for  their  loss 
by  carrying  more  glass,  for,  as  has  been  said,  it  cannot 
be  assumed  that  the  low  rates  charged  will  stimulate 
trafiOic  in  imported  glass,  any  more  than  correspondingly 
low  rates  would  stimulate  traffic  in  domestic  glass. 
Non-discriminating  rates,  with  exceptions  to  be  presently 
noted,^  at  least  if  they  can  be  secured  without  lessening 
the  stimulus  of  competition,  or  without  raising  average 
transportation  charges,  are  economically  more  desirable.^ 

1  Chapter  V  (of  Part  III). 

*  A  secondary,  though  doubtless  in  practice  very  slight,  result  of  such  artificial 
stimulus  of  imports,  is  the  tendency  for  money  to  flow  abroad,  making  prices 
lower  here  and  higher  there.  As  a  consequence,  we  must  pay  somewhat  more 
for  what  we  buy  abroad,  while  we  receive  somewhat  less  for  what  we  sell.  In 
other  words,  the  rate  of  interchange  of  our  goods  for  foreign  goods  is  made  less 
favorable.  When  this  is  an  incidental,  as  well  as  a  relatively  minor,  consequence 
of  a  trade  profitable  to  us,  we  need  not  complain ;  but  it  deserves  to  be  mentioned 
as  an  additional  disadvantage  from  the  stimulating  of  an  uneconomical  trade. 


UNDESIRABLE   PLACE   DISCRIMINATION    107 

It  hardly  needs  to  be  added  that  the  reverse  system 
of  artiiicially  favoring  home  producers  is  also  uneco- 
nomical, whether  it  takes  the  form  of  shutting  out  for- 
eign goods  by  arbitrarily  high  rates,  or  of  subsidizing 
domestic  producers  by  rates  unduly  low.^  Such  a  policy 
of  discrimination  against  foreign  producers  is  most  likely 
to  be  followed  —  as  it  is,  in  fact,  followed  in  Germany  ^ 
—  where  railways  are  operated  by  government,  and 
where,  therefore,  railway  policy  becomes  a  matter  of 
poHtics  and  may  be  turned,  purposely,  to  protectionist 
ends. 

It  is  also  possible  to  use  publicly  managed  railroads 
to  derive  public  revenue  from  the  importation  of  goods 
not  produced  within  the  country,  i.e.  to  use  them  as  a 
means  of  collecting  import  duties  not  intended  to  be 
protective.  Or  railroads  can  be  used,  as  in  Germany,^ 
to  raise  a  revenue  for  government  from  traffic  in  general. 
Obviously  such  a  poHcy  is  in  danger  of  being  carried 
too  far,  of  unduly  preventing  a  geographical  division  of 
labor  which  might  be  profitable,  and  so  of  preventing 
the  growth  of  that  fund  of  national  wealth  from  which 
all  taxes  must  be  drawn. 

It  is  apparent  that  the  relations  of  different  rates  to 
each  other  are  likely  to  be  dift'erent  when  all  or  nearly 
all  the  railroads  of  a  country  are  under  one  control,  e.g. 
government  control  as  in  Germany,  than  when  they  are 
operated  by  different  companies,  each  anxious  to  develop 
its  own  business  regardless  of  what  happens  to  the  rest. 
In  the  one  case,  discrimination  between  places  may  be 
reduced  to  a  minimum,  except  as  protectionist  influences 

«  Cf.,  however,  Chapter  V  (of  Part  III),  §  6. 

'  H.  R.  Meyer,  Government  Regulation  of  Railway  Rates,  New  York  (Mao 
millan),  1905,  p.  35. 
*  Ibid.,  pp.  72,  73. 


io8    TRANSPORTATION   COSTS  OF  COMMERCE 

prevail.  In  the  other  case,  discrimination  between 
places  will  tend  towards  a  maximum,  except  as  it  is 
prevented  by  government  regulation.  Discriminations 
which,  if  not  effectively  prohibited  from  doing  so,  a  rail- 
road might  feel  obUged  to  make  in  the  latter  case,  would 
often  be  discriminations  which  would  not  benefit  but 
which  would  tend  to  injure  the  country,  and  the  railroad 
systems  considered  all  together,  and  which,  therefore, 
if  the  same  interest  controlled  all  the  lines,  would  not 
be  made.  It  should  be  added  that  somewhat  higher 
rates  in  proportion  to  distance  carried,  for  short-haul 
than  for  long-haul  traffic,  are  not  necessarily  discrimina- 
tions. While  the  train  mileage  costs  increase  as  distance 
increases,  the  terminal  expenses  do  not.  If  a  proper 
amount  to  cover  terminal  expenses  is  added  to  a  hauHng 
charge  made  in  proportion  to  distance,  the  total  will  be 
absolutely  less  but  greater  in  proportion  for  short  dis- 
tances than  for  long.  It  will  not,  however,  on  that 
account  be  discrimination. 

§4 
The  Uneconomy  of  the  " Basing-point^^  System 

It  has  been  argued  by  some  economists  ^  that  dis- 
crimination between  places  may  be  economically  justifi- 
able for  the  purpose  of  concentrating  the  movement  of 
freight  upon  "basing  points,"  thence  to  be  redistributed 
to  surrounding  towns.  Thus,  in  this  view,  it  might  be 
preferable  that  freight  should  be  carried  from  Boston 
or  New  York  to  Montgomery,  Ala.,  in  carload  or 
trainload  lots  and  thence  distributed  by  jobbers  to 
neighboring  towns  in  less  than  carload  lots,  rather  than 

*  For  example,  H.  R.  Meyer,  Government  Regulation  of  Railway  Rates,  p.  298. 


UNDESIRABLE   PLACE   DISCRIMINATION    109 

that  shipments  should  go  direct  from  the  North  to  dealers 
in  these  other  towns  and,  therefore,  all  the  way  in  small 
consignments.  The  basing-point  system  of  the  South 
tended  to  the  former  result  by  making  rates  to  all  local 
points  equal  to  the  rate  to  the  "basing  point"  plus  a 
local  rate  from  there  on  or  a  local  rate  back  to  an  inter- 
mediate town.  Thus,  the  rate  from  New  York  to 
Troy,  Ala.,  was  made  by  taking  the  rate  to  Mont- 
gomery and  adding  the  local  rate  (a  higher  rate  per 
mile)  between  Montgomery  and  Troy/  even  though 
Troy  was  in  many  cases  the  nearer  point  and  goods  to 
Montgomery  were  to  a  considerable  extent  hauled  to 
that  place  through  Troy. 

The  error  in  the  argument  favoring  this  practice  lies 
in  the  assumption,  too  readily  arrived  at,  that,  without 
place  discrimination,  freight  must  move  toward  its 
destination  all  the  way  in  small  lots.  Nothing  could  be 
farther  from  the  truth.  It  needs  but  to  make  a  proper 
difference,  dependent  upon  difference  in  cost  of  carriage, 
in  wholesale  and  retail  rate,  such  as  a  difference  between 
the  rate  for  carload  as  distinguished  from  less  than  car- 
load shipments,  to  secure  the  larger  shipments  presum- 
ably to  the  extent  that  they  ought  to  be  large.  If  it 
really  costs  less  per  ton  to  carry  goods  in  carload  lots 
than  in  smaller  quantities,  then  the  railroads  should 
and  legally  may,  as  in  practice  they  usually  do,  make  a 
distinction  in  the  rate.  Wliere  the  advantage  of  having 
goods  move  in  smaller  quantities  and  more  frequently 
more  than  offsets  the  disadvantage  of  the  higher  cost, 
and  therefore  rate,  they  will  be  moved,  and  ought  to  be, 
in  less  than  carload  lots.  In  many  cases  it  may  be 
desirable    that    they   should    go    in    smaller    quantities 

*  See  Interstate  Commerce  Reports,  Vol.  VI,  pp.  3-35. 


no    TRANSPORTATION  COSTS  OF  COMMERCE 

direct  to  retail  dealers,  even  at  a  higher  rate,  rather  than 
be  burdened  with  two  sets  of  loading  and  unloading 
expenses.  But  where  there  is  no  such  advantage,  the 
tendency  will  be  for  the  goods  to  be  carried  in  larger 
shipments.  If  it  is  really  more  economical  for  goods  to 
be  carried  to  Montgomery  in  carload  lots  and  thence 
redistributed,  and  if  the  difference  in  the  carload  and 
less  than  carload  rates  is  an  accurate  measure  of  the 
difference  in  economy  or  cost,  then  the  small  neighbor- 
ing dealer  will  find  that  he  can  more  cheaply  buy  his 
goods  in  Montgomery  or  some  other  large  near-by  city 
from  a  jobber  to  whom  they  have  come  by  carload  lot, 
than  he  can  get  them  from  Boston  or  New  York  in  smaller 
amounts.  The  consequence  will  be  that  the  large  jobber 
will  establish  himself  in  some  trade  center  from  which 
he  will  supply  the  surrounding  market. 

There  is  ample  evidence  from  experience,  that  the 
territorial  distribution  of  the  jobbing  trade  is  greatly 
dependent  on  the  relation  of  carload  to  less  than  carload 
rates.  In  one  of  the  cases  before  the  Interstate  Com- 
merce Commission,  involving  rates  from  eastern  and 
middle  western  points  to  the  Pacific  Coast,^  a  considerable 
part  of  the  complaint  was  that  the  roads  made  too  great  a 
difference  in  rates  between  carload  and  less  than  carload 
shipments  and  that,  partly  in  consequence  of  this  dif- 
ference,^ goods  were  shipped  to  far  western  jobbers  in 
carload  lots,  to  be  by  them  redistributed,  whereas  they 
might  otherwise  have  been  sent  in  smaller  quantities 
from  St.  Louis  and  other  middle  western  jobbing  centers, 
direct  to  the  far  western  retailers.     In  this  case  it  was 


1  Interstate  Commerce  Reports,  Vol.  IX,  pp.  318-372. 

*  Although  partly,  doubtless,  because  of  lower  rates  to  the  coast  than  to  inland 
far  western  points. 


UNDESIRABLE   PLACE   DISCRIMINATION    iii 

alleged  that  the  difference  in  rates  on  shipments  of  the 
larger  and  smaller  amounts  was  excessive,  and  unduly 
and  unfairly  built  up  the  far  western  jobbing  centers  at 
the  expense  of  the  Middle  West.  Either  an  excessive 
difference  or  too  small  a  difference,  i.e.  any  difference 
other  than  that  properly  required  by  the  difference  in 
cost,  tends  to  make  freight  move  in  uneconomical  ways ; 
but  it  is  sufficiently  clear  that  the  extent  to  which  goods 
are  shipped  in  large  lots  to  distributing  centers  is  con- 
siderably affected  by  comparative  carload  and  less  than 
carload  rates ;  and  it  is  not  unreasonable  to  conclude 
that  a  difference  based  on  difference  in  cost  to  the  trans- 
portation company  will  tend  to  bring  large-scale  ship- 
ment to  whatever  extent  is  most  economical,  and  will 
tend  to  build  up  jobbing  centers  where  the  economic 
welfare  of  the  community  most  requires  them. 

It  does  not,  then,  require  arbitrary  discrimination 
between  places  to  bring  about  shipment  of  goods  in  the 
most  economical  way.  And  arbitrary  discrimination 
between  places,  so  far  as  it  brings  about  the  wholesale 
shipment  which  a  system  of  rates  based  upon  cost  would 
also  bring  about,  may  result,  just  because  it  is  a  purely 
arbitrary  rather  than  the  natural  method  of  attaining 
the  desired  end,  in  a  location  of  jobbers  in  a  city  favored 
by  the  rate  system,  when  they  would  otherwise,  perhaps, 
find  a  different  city  more  advantageous.  The  basing- 
point  system,  in  other  words,  may  be  a  comparatively 
artificial  selection  and  building  up  of  wholesale  or  job- 
bing centers,  as  contrasted  with  a  possible  selection 
and  development  less  artificial  and  more  desirable. 
The  basing-point  system  may,  also,  because  of  its  arbi- 
trary discrimination,  unduly  and  uneconomically  con- 
centrate business  at  the  favored  point. 


112    TRANSPORTATION  COSTS  OF  COMMERCE 

§  5 

Discrimination  in  Favor  of  Intrastate  Business,  Resulting 
from  Orders  of  State  Commissions 

No  less  objectionable  than  discrimination  caused  by 
competitive  conditions  or  by  the  arbitrary  action  of 
transportation  company  managers,  is  discrimination 
brought  about,  as,  on  occasion,  it  has  been  brought 
about,  by  the  orders  of  state  railroad  commissions.  To 
illustrate,  the  Texas  Railroad  Commission  not  long 
since  ordered  rates  on  traffic  from  Dallas  and  Houston 
to  various  other  Texas  points,  so  low  as  to  put  Shreve- 
port,  La.,  at  a  disadvantage  in  seeking  to  market  goods, 
competitively  with  Dallas  and  Houston,  in  these  other 
Texas  centers. 

Such  discrimination  is  partly  analogous  to  a  protective 
tariff  (around  the  borders  of  Texas).  It  would  tend 
somewhat  to  prevent  the  bringing  of  goods  into  Texas 
from  points  outside  of  that  state.  But  it  differs  from 
protection  because  it  operates  not  alone  and  not  inten- 
tionally through  high  rates  on  imported  goods.  A  state 
commission,  indeed,  would  have  no  shadow  of  power  to 
order  an  increase  of  rates  on  interstate  traffic.  The 
discrimination  in  question  operates  rather  through  the 
enforced  reduction  of  intrastate  rates.  There  is  here, 
therefore,  some  resemblance  to  a  bounty  or  subsidy  on 
internal  trade.  Nothing  is  done,  directly,  to  prevent 
importation.  But  home  producers,  or  jobbers,  or  both, 
are  favored  by  the  low  intrastate  rates.  If  the  state 
were  to  compensate  the  railroads  operating  within  it, 
for  any  loss  so  caused,  the  burden  of  the  lower  rates 
would  fall  on  taxpayers,  and  the  analogy  with  a  bounty 


UNDESIRABLE   PLACE   DISCRIMINATION    113 

or  subsidy  would  be  complete.^  We  should  then  cer- 
tainly contend  that  even  the  Texans  themselves,  as  a 
whole,  gained  nothing  from  the  discrimination.  Every 
dollar  thus  saved  by  a  Texas  consumer,  through  patroniz- 
ing a  home  producer  or  jobber  favored  by  the  low  rates, 
would  be  a  dollar  filched  from  the  Texas  taxpayers. 
And  to  the  extent  that  an  outside  producer  could  sell, 
if  not  discriminated  against,  more  cheaply,  the  taxpayers 
must  lose  by  such  discrimination  more  than  the  con- 
sumer gains.  Furthermore,  Texas  industry  would  be 
diverted  out  of  its  most  profitable  channels,  artificially, 
and  at  the  expense  of  Texas  taxpayers. 

There  is  not,  of  course,  in  practice,  any  such  compen- 
sation made  to  railroad  security  owners,  by  a  state,  for 
low  intrastate  rates.  But  our  conclusions  as  to  the 
unwisdom  of  the  policy  are  not,  on  that  account,  very 
different.  The  loss  resulting  from  the  reduced  rates,  if 
taxpayers  are  not  to  bear  it,  must  fall  either  upon  the 
owners  of  railroad  securities,  who  thus  get  smaller  re- 
turns, or  upon  other  shippers  and  consumers  who  have  to 
pay  higher  rates  than  would  else  be  required.  These 
other  shippers  and  consumers  may  be,  to  a  large  extent, 
persons  in  Texas  who  ship  goods  to  and  get  goods  from 
other  states.  Shippers  and  consumers  in  these  other 
states  may  hkewise  suffer.  If  intrastate  rates  may  be 
made  too  low  to  yield  a  fair  profit,  the  opportunities  for 
enforced  reduction  of  high  interstate  rates  become  less 
favorable.  So  far  as  interstate  rates  might  thus  remain 
higher  than  they  would  otherwise  be,  they  must  operate, 
like  a  protective  tariff,  to  prevent  trade  profitable  both 
to  the  rate-reducing  state  and  to  the  other  states.  It 
is  difficult  to  believe  that  a  state  can  gain  any  permanent 

>  See  Part  U,  Chapter  VII  and  §§  2,  3,  and  4  of  Chapter  Vm. 
PART  III  —  I 


114    TRANSPORTATION  COSTS  OF  COMMERCE 

benefit  from  the  enforcement  of  discriminatory  and  un- 
duly low  rates  on  intrastate  business.  If  it  secures  a 
temporary  gain  at  the  expense  of  inadequate  returns  to 
railroad  investors,  the  building  of  railroad  mileage  within 
the  state  will  be  discouraged.  If  the  low  intrastate 
rates  involve  higher  interstate  rates,  they  act  like  a  pro- 
tective tariff  in  restricting  profitable  trade  and  like  a 
bounty  in  encouraging  unprofitable  trade ;  though  the 
burden  of  this  "bounty"  falls  upon  those  who  still  en- 
gage in  interstate  business,  rather  than  upon  the  body 
of  taxpayers.  And  neighbor  states  are  hardly  likely  to 
allow  the  railroads  to  recoup  any  losses  suffered,  by 
charging  high  intrastate  rates  within  their  borders. 

A  state  commission  may  properly  prevent  the  charg- 
ing of  exorbitant  or  monopoly  rates  on  intrastate  busi- 
ness, and  throw  upon  the  Federal  body  the  responsibility 
for  discrimination  against  interstate  business,  resulting 
from  unduly  high  rates  allowed  on  such  business.  But 
it  should  not,  even  for  the  welfare  of  the  state  itself, 
enforce  discriminating  and  unfairly  low  intrastate  rates. 
Nor  can  such  a  poHcy  be  allowed  by  the  Federal  govern- 
ment, even  if  individual  states  short-sightedly  favor  its 
application  within  their  boundaries. 

In  the  Shreveport  case,  complaint  was  made  to  the 
Interstate  Commerce  Commission  against  the  discrimi- 
nation to  which  Shreveport  was  subjected.  The  Inter- 
state Commission  ordered  that  the  discrimination  should 
cease.  It  fixed,  to  be  sure,  maximum  rates,  thus  cor- 
recting the  discrimination,  in  part,  by  reducing  inter- 
state rates.  But  it  allowed  the  discrimination  to  be 
partly  corrected  by  the  raising  of  intrastate  rates,  from 
Dallas  and  Houston  to  other  Texas  points.  Appeal  was 
therefore  made  to  the  Commerce  Court  and  from  it  to 


UNDESIRABLE   PLACE   DISCRIMINATION    115 

the  SuDieme  Court.^  The  ruling  of  the  Interstate  Com- 
mission was  objected  to  as  beyond  its  authority,  on  the 
ground  that  this  Commission  has  no  authority  over 
rates  on  trafl&c  wholly  within  a  state  and  that  some  of 
the  intrastate  rates  in  question  had  been  fixed  by  the 
Railroad  Commission  of  Texas  below  the  maximum 
rates  prescribed  by  the  Interstate  Commerce  Commis- 
sion for  interstate  traffic.  The  Supreme  Court,  in  hand- 
ing down  a  decision  favorable  to  the  Federal  regulating 
body,  declared  that  Congress  has  the  right  to  prevent 
such  discrimination  against  interstate  commerce  as  would 
have  resulted  from  the  uncorrected  Texas  rates,  and,  in 
general,  that  Congress  has  authority  to  prevent  any  use 
of  an  instrumentality  of  interstate  commerce  (e.g.  a 
railroad)  which  would  discriminate  against  such  com- 
merce. The  power  to  deal  with  the  relation  of  intrastate 
and  interstate  rates,  as  a  relation,  the  court  asserted  to 
lie  wholly  with  Congress.- 

§6 

Discrimination  by  a  Transportation  Company  in  Favor  of 
Traffic  Moving  a  Long  Distance  over  its  Own  Lines 

Discrimination  may  also  result  from  the  desire  of  a 
railroad  (or  navigation  company)  to  give  preference  to 
traffic  moving  solely  or  mainly  over  its  own  Hnes  as 
against  traffic  using  chiefly  the  lines  of  another  com- 
pany.    Thus,  goods  may  be  produced  at  some  point  or 

'  Houston  and  Texas  Railway  v.  United  Stales,  234  U.  S.,  342. 

*The  decision  in  the  Minnesota  Rate  case  (230  U.  S.,  352)  is  not  incon- 
sistent with  this.  In  that  case  the  court  upheld  state-made  rates  which  were 
asserted  to  involve  discrimination  against  interstate  commerce.  But  in  that 
case,  as  the  court  took  occasion  to  point  out,  no  application  of  Federal  regula- 
tion through  a  decision  of  the  Interstate  Commerce  Commission  was  before  it 
for  review. 


ii6    TRANSPORTATION  COSTS  OF  COMMERCE 

points  on  a  railroad  and  be  marketable  in  two  or  more 
directions ;  and  it  may  be  that  if  the  goods  are  sent  in 
one  of  these  directions  they  will  soon  leave  the  rails  of 
the  originating  Hne  to  complete  the  journey  over  another 
road,  while  if  they  are  sent  to  a  market  in  a  different 
direction,  the  originating  road  can  carry  them  most  or 
all  of  the  way.  Under  such  circumstances,  the  originat- 
ing road  may  be  tempted  to  charge  comparatively  high 
rates  per  mile  for  its  part  of  the  joint  haul  made  by 
small  use  of  its  own  rails,  while  charging  comparatively 
low  rates  per  mile  on  traffic  going  the  long  distance  over 
its  own  lines. 

In  a  case  decided  by  the  Interstate  Commerce  Com- 
mission in  1900,  it  appeared  that  the  Louisville  and 
Nashville  Railroad  was  engaging  in  this  practice  in 
regard  to  naval  stores  and  cotton  shipped  from  points 
on  its  Pensacola  and  Atlantic  division  in  Florida.  These 
goods,  if  shipped  eastward,  e.g.  to  Savannah,  soon  left 
the  lines  of  the  Louisville  and  Nashville  road,  reaching 
Savannah  over  other  lines ;  while  if  they  were  shipped 
westward,  some  of  them  would  eventually  be  carried 
hundreds  of  miles  over  its  own  rails.  The  eastward 
rates,  accordingly,  were  kept  comparatively  high  and 
the  westward  rates  made  comparatively  low,  largely  in 
order  to  discourage  eastward  and  encourage  westward 
shipments.  Such  a  poHcy  involves  discrimination  be- 
tween the  markets  to  which  the  goods  may  be  sent,  — 
in  the  case  mentioned,  it  involved  discrimination  against 
Savannah;  it  may  cause  traffic  to  flow  in  an  uneco- 
nomical direction;  and  it  may  compel  the  market 
(Savannah,  in  this  case)  on  the  lines  of  the  connecting 
railroad,  to  draw  suppHes  from  a  relatively  uneconomical 

» Interstate  Commerce  Reports,  Vol.  VIII,  pp.  376-408. 


UNDESIRABLE   PLACE   DISCRIMINATION    117 

source.  Nor  do  the  transportation  companies  them- 
selves, as  a  whole,  benefit  from  such  a  policy,  since  the 
traffic  which  any  one  company  gains  by  thus  preferring 
it  own  lines,  another  company  loses ;  and  the  policy,  if 
allowed,  can  be  practiced  independently  and  in  retalia- 
tion by  all  the  companies.  The  Interstate  Commerce 
Commission,  in  the  case  above  cited,  declared  the  dis- 
crimination practiced  to  be  unreasonable,  and  ordered 
a  readjustment  which  partially,  at  least,  corrected  the 
evil  complained  of. 

A  railroad  may  Hkewise  endeavor,  by  means  of  dis- 
criminating rates,  to  supply  cities  on  its  own  lines  mainly 
with  goods  which  it  carries  a  long  distance  over  its  own 
rails,  rather  than  with  goods  produced  at  other  points, 
which  must  be  deHvered  to  it  by  connections  and  which 
it  can  carry  but  a  few  miles.  This  species  of  discrimina- 
tion, also,  involves  economic  waste  and  has  been  dis- 
approved of  by  the  Interstate  Commerce  Commission.^ 

§7 

Summary 

Discrimination  between  places  we  have  seen  to  be 
chiefly  due  to  competition.  This  competition  may  be 
competition  of  routes,  competition  of  directions,  or  com- 
petition of  locations.  It  may  even  be  competition  with 
local  self-sufficiency. 

Competition  between  two  or  more  railroad  companies, 
which  causes  discrimination  by  each  in  favor  of  com- 
petitive and  against  intermediate  traffic,  involves  waste. 
The  railroad  plants,  considered  altogether,  are  probably 

1  Interstate  Commerce  Reports,  Vol.  VI,  pp.  488-519  (see,  especially,  pp. 
$•^5,  516). 


ii8    TRANSPORTATION  COSTS  OF  COMMERCE 

not  more  fully  utilized  than  if  rates  were  no  higher  on 
the  average  and  more  equal,  though  one  or  more  plants 
may  be  more  fully  utilized  and  the  others,  or  other,  less 
so.  Industry  is  less  apt  to  develop  in  those  places  where 
the  natural  advantages  favor  it.  Rather  is  its  location 
partly  determined  by  the  fact  of  railroad  competition 
at  some  points  and  not  at  others.  Furthermore,  goods 
may  frequently  be  carried  by  rail  a  longer  distance, 
when  a  more  economical  location  of  industries  would 
result  in  their  being  carried  a  shorter  distance. 

This  kind  of  discrimination  between  places  has  been 
practiced  by  American  railroads,  in  favor  of  import 
traffic,  as  against  carriage  of  goods  from  an  American 
center  of  production,  to  the  same  American  consuming 
center.  The  consequent  tendency  is  for  American  labor 
and  capital  to  be  kept  out  of  or  driven  out  of  a  line 
which  they  would  otherwise  naturally  follow.  Goods 
are  imported  from  abroad  which  might  be  produced 
with  less  labor  cost  at  home.  Discrimination  against 
imported  goods  is  more  likely  to  be  practiced  by  a  gov- 
ernment railroad  system  influenced  by  protectionist 
motives.  It  is  no  less  uneconomical  than  the  reverse 
practice.  Discrimination  in  favor  of  imported  goods 
tends  to  drive  a  country's  industry  out  of  channels 
which  it  might  profitably  follow.  Discrimination  against 
imported  goods  tends  to  guide  a  country's  industry  into 
channels  which  are  not  profitable. 

The  basing-point  system  has  sometimes  been  defended 
as  a  kind  of  discrimination  between  places,  which  con- 
duces to  economy  of  transportation  by  favoring  large 
shipments.  But  it  appears  that  an  economically  justi- 
fiable difference  in  rates  on  carload  and  less  than  car- 
load freight,  based  on  actual  difference  in  cost  of  carry- 


UNDESIRABLE   PLACE   DISCRIMINATION    119 

ing,  is  likely  to  secure  large-scale  shipment  so  far  as  it 
should  be  secured.  And,  on  the  other  hand,  the  basing- 
point  system,  like  other  discrimination  between  cities, 
may  tend  to  develop  business  in  a  favored  city  at  the 
expense  of  some  other,  better  situated  city,  and  beyond 
what  true  national  economy  would  justify. 

Unduly  low  intrastate  rates  made  by  a  state  com- 
mission, for  the  encouragement  of  shippers  within  the 
state  as  against  competitors  from  outside,  are  adverse 
to  the  general  interest  of  the  American  public  and  are 
practically  certain  to  injure  even  the  state  which  en- 
deavors to  enforce  them.  Federal  power,  operating 
through  the  Interstate  Commerce  Commission,  is,  how- 
ever, supreme  where  interstate  business  is  discriminated 
against  and  can  put  a  stop  to  such  discrimination. 

Discrimination  by  a  transportation  company  against 
goods  coming  from  or  going  to  points  on  other  lines,  in 
order  to  force  goods  to  go  long  distances  over  its  own  lines, 
also  involves  economic  waste. 


CHAPTER  V 

Economically    Defensible    Discrimination   among 

Places 

§  I 

Discrimination  among  Places^  by  a  Roundabout  Line 

In  the  last  chapter  we  saw  that  discrimination  among 
places,  caused  by  competition  at  some  places  and  not  at 
others,  and  practiced  on  all  the  lines  or  routes  engaged  in 
this  competition,  involves  economic  waste.  But  there 
are  situations  in  which  discrimination  by  a  railroad  in 
favor  of  junction  points,  and  against  intermediate  points, 
is  not  uneconomical.  Such  a  situation  may  exist  when 
one  of  the  lines  connecting  two  junction  points  is  appre- 
ciably more  roundabout  than  the  other  or  others.  We 
saw,  in  a  previous  chapter,^  that  goods  might  more 
profitably  be  carried  by  a  relatively  roundabout  line  in 
three  cases :  first,  when  traffic  is  in  excess  of  the  facilities 
of  more  direct  lines  and  the  surplus  can  be  carried  by  the 
roundabout  one,  this  may  be  better  than  to  invest  addi- 
tional capital  in  direct  fines;  second,  when  a  new  fine 
or  an  additional  line  must  be  constructed  for  traffic 
between  two  points,  a  roundabout  fine  may  sometimes 
be  preferable  and  able  to  carry  the  traffic  more  cheaply, 
by  virtue  of  securing  more  intermediate  traffic  to  help 
pay  general  expenses,  interest,  and  profits ;  third,  when 
facifities  are  in  excess  of  traffic  and  must  be  in  part 

1  Chapter  II  (of  Part  III),  §  2. 
120 


•^c 


DEFENSIBLE   PLACE   DISCRIMINATION     i2i 

abandoned,  it  may  be  desirable  to  continue  operating  a 
relatively  roundabout  line  between  two  points  if  inter- 
mediate business  pays  part  of  its  expenses  and  profits 
and  enables  it  to  carry  the  through  business  for  the 
lowest  rates.  But  if  a  relatively  devious  line,  A  BCD 
(see  figure  13),  is  to  carry  traffic  between  two  points,  A 

A* ^ X-^ 

\ 

"•-* 

Figure  13 

and  D,  which  are  or  can  be  served  by  a  more  direct  road, 
the  roundabout  Une  must  be  permitted  to  make  rates  at 
least  as  low  as  those  the  direct  line  does  or  would  make. 
If  the  direct  road  is  there,  the  roundabout  road,  A  BCD, 
will  have  to  make  an  equally  low  rate  between  A  and  D, 
to  get  a  satisfactory  share  of  the  traffic.  Furthermore, 
the  cities  A  and  D  may  claim,  with  reason,  that  their 
situation  with  respect  to  each  other  entitles  them  to  a 
rate  on  traffic  between  them,  based  on  the  shortest 
distance  connection ;  and  that  even  if  a  short  fine  did 
not  exist,  the  rate  between  them  should  not  be  much,  if 
any,  higher  than  would  yield  a  fair  profit  on  the  capital 
required  for  such  a  direct  line.^     A  higher  rate  would 

•  This  does  not  mean  that  the  longer  distance  points  can  always  reasonably 
expect  low  rates  on  traffic  between  them,  for  such  traffic  may  sometimes  be  so 
light  that  a  direct  road  could  not  be  made  to  pay  or  could  be  made  to  pay  only 
by  charging  very  high  rates.  A  roundabout  line  may  conceivably  be  able  to 
charge  rates  no  higher,  perhaps  lower,  and  still  not  discriminate  against  inter- 
mediate points.  If  so,  discrimination  by  such  a  line  against  intermediate 
points  would  not  be  justifiable. 


122    TRANSPORTATION  COSTS  OF  COMMERCE 

be  exorbitant  and  would  subject  A  and  D  to  unreason- 
able disadvantage.  A  higher  rate  would  not  be  normal 
and  could  only  continue  if  no  new  company  dared  enter 
the  business.  For  a  normal  rate  is  one  which  yields  the 
average  return  on  the  capital  necessary  for  the  service. 
The  roundabout  line  A  BCD  has  been  made  long  in 
order  that  it  might  serve  B  and  C.  Its  roundaboutness  is 
largely  for  their  benefit.  The  extra  cost  incurred  was 
incurred  entirely  for  the  sake  of  intermediate  trafl&c,  e.g. 
A  to  B,  A  to  C,  B  to  C,  etc.  The  burden  of  this  cost 
caimot,  except  arbitrarily  or  by  favoritism,  be  imposed 
upon  the  through  traffic  between  A  and  D. 

In  such  a  case  as  we  have  under  discussion,  it  may  be 
economically  desirable  that  the  long  fine  should  get  at 
least  a  share  of  the  business,  rather  than  that  it  should 
refuse  to  compete,  and  should,  therefore,  for  one  possibil- 
ity, encourage  additional  track  building  by  a  more  direct 
road.  Also,  it  may  be  necessary  and  right  that  the  long- 
distance business,  A  to  D  and  DtoA,  should  not  have  to 
pay  high  rates.  Yet  the  indirect  fine  probably  cannot, 
with  reason,  be  expected  to  reduce  all  of  its  intermediate 
rates  to  an  equally  low  level.  From  ^  to  C  over  the 
roundabout  fine  is  farther  than  from  A  to  D  over  a 
direct  fine.  To  compel  the  road  A  BCD  to  charge  as 
little  or  less  from  ^  to  C  as  should  be  charged  and  as  it 
probably  has  to  charge  from  A  to  D,  may  deprive  it  of 
a  fair  return.  Such  a  poHcy,  consistently  appHed  over 
a  long  period  of  years,  would  tend,  somewhat,  to  prevent 
the  buildmg  of  roundabout  lives  having  to  rely  upon  long- 
distance traffic  for  part  of  their  returns.  It  would  tend, 
therefore,  to  deprive  intermediate  points  not  in  a  direct 
line  between  two  given  points,  of  railroad  service.  To 
follow  the  poHcy  of  letting  the  roundabout  line  dis- 


DEFENSIBLE   PLACE   DISCRIMINATION      123 

criminate  against  the  intermediate  points,  may  therefore 
make  the  discrimination  against  them  really  less  than  it 
otherwise  would  be.  If  such  discrimination  is  prohibited, 
it  may  well  happen  that  these  intermediate  points  will 
either  have  no  service,  or  will  have  to  pay  in  rates  the  entire 
expenses  and  profits  of  a  road ;  while  A  and  D  continue  to 
get  rates  at  least  as  low  as  a  direct  line  can  afford  to  charge, 
for  if  the  reasonable  rate  over  the  direct  line  is  not  made 
voluntarily,  it  may  be  forced  by  regulation. 

On  the  other  hand,  the  extent  to  which  this  discrimina- 
tion may  properly  be  carried  is  not  without  limit.  The 
longer  line  should  not  be  allowed  to  charge  rates  on  its 
intermediate  traffic,  where  it  has  a  monopoly,  higher 
than  would  yield  a  fair  profit  on  capital  invested,  from 
that  traffic  alone.  Neither  should  it  be  allowed  to  engage 
in  competition  for  the  longer  distance  traffic  between  A 
and  D,  even  if  it  were  foolish  enough  to  attempt  to  or 
would  do  so  as  a  matter  of  temporary  policy,  at  rates 
which  would  pay  less  than  the  special  additional  cost 
(train  mileage  and  terminal  expenses)  of  carrying  this 
longer  distance  traffic.  If  a  direct  line  can  afford  to 
carry  the  traffic  for  rates  less  than  would  yield  the  round- 
about road  some  slight  return  above  this  cost,  the  direct 
line  may  properly  be  allowed  to  have  it. 

But  we  have  seen  that  when  competition  between  two 
or  more  lines  causes  discrimination  against  intermediate 
points  on  all  such  lines,  there  is  a  tendency  towards 
uneconomical  application  of  the  community's  labor 
force. ^  Even  though  the  direct  line  taps  less  inter- 
mediate traffic  than  the  other,  it  is  almost  certain  that 
it  will  tap  some,  e.g.  A  to  E.  While  the  reasons  given 
may  sometimes  justify  a  Umited  amount  of  discrimina- 

»  Chapter  IV  (of  Part  UI),  §  2. 


124    TRANSPORTATION  COSTS  OF  COMMERCE 

tion  in  favor  of  A  and  D  traffic  as  compared  with  inter- 
mediate traffic  on  a  roundabout  line,  they  do  not  justify 
on  grounds  of  economy,  discrimination  in  favor  of  A  and 
D  trafl&c  as  compared  with  intermediate  traffic,  A  to  E, 
etc.,  by  a  direct  Une.'  A  and  D  may  reasonably  urge 
that  they  are  entitled  to  a  rate  between  them  which  can 
be  afforded,  without  discrimination,  by  a  direct  fine,  and 
that  an  indirect  line,  if  this  A  and  D  traffic  can  be  more 
economically  carried  by  it,  can  properly  make  such  a  rate. 
But  A  and  D  cannot  reasonably  urge  that  they  are  entitled 
to  a  low  rate  on  the  direct  line  at  the  expense  of  E. 

We  conclude,  then,  that  the  rates  on  intermediate 
traffic  on  neither  line  should  exceed  a  fair  profit  on  the 
requisite  capital  for  taking  this  traffic;  that  the  rates 
on  the  competitive  traffic  should  not  exceed  what  would 
give,  along  with  the  charges  on  intermediate  traffic,  a  fair 
profit  on  the  cost  of  a  direct  line ;  and  that  discrimination 
on  a  direct  line  is  not  economically  justifiable.  How  can 
the  government  or  a  government  regulating  body  make  its 
rulings  consistent  with  all  these  principles,  while  yet  not 
preventing  the  carriage  of  goods,  in  each  case,  by  the 
more  (or  the  most)  economical  line  ?  The  conclusion  at 
which  we  shall  arrive  is  substantially  the  same  (though 
it  will  be  stated  more  completely)  as  was  arrived  at  in 
a  previous  chapter.^  The  direct  line  may,  in  most 
cases,  properly  be  prohibited  from  discriminating  at 
all,  or  at  least  from  discriminating  appreciably,  against 
intermediate  traffic.  But  such  prohibition  will  make  it 
impossible  for  the  direct  line  to  carry  the  A  to  D  and  D 
to  A  traffic  for  the  bare  additional  cost  to  it  of  carrying 
this  traffic,  since  this  traffic  must  then  pay  a  good  share 

*  See,  however,  §  5  of  this  Chapter  (V  of  Part  III). 

*  Chapter  II  (of  Part  III),  §  2. 


DEFENSIBLE   PLACE   DISCRIMINATION      125 

of  its  general  expenses,  interest,  and  profits.  To  let  the 
roundabout  line  carry  this  through  traffic  for  the  bare 
additional  cost  of  carrying,  while  forbidding  any  discrim- 
ination on  the  direct  road,  would  frequently  give  the 
roundabout  hne  an  undue  advantage  and  would  be  likely 
to  result  in  its  taking  most  or  all  of  this  through  traffic, 
whether  it  was  the  more  economical  route  or  not.  To  abso- 
lutely forbid  discrimination  by  the  roundabout  line 
would  be  Ukely,  as  we  have  seen,^  to  prevent  that  Hne 
from  carrying  any  of  the  through  traffic,  whether  it  was 
economically  desirable  that  it  should  carry  any  of  this 
traffic  or  not.  If  it  is  desirable  that  the  direct  Une  should 
not  discriminate  at  all,  some  limit  must  frequently  be 
placed  to  the  discrimination  allowed  on  the  longer  hne, 
beyond  requiring  that  it  shall  not  carry  competitive 
traffic  at  a  loss  and  that  it  shall  not  charge  exhorbitant 
rates  on  non-competitive  trafi&c.  The  aim  should  be  to 
leave  the  two  (or  more)  railroads,  after  regulation  of 
discrimination,  in  the  same  relative  positions  as  before, 
so  that  each  road  would  still  be  able  to  take,  in  competi- 
tion, the  business  which  it  was  most  fitted,  economically, 
to  take.  Properly  to  decide,  in  each  case,  what  relation 
of  rates  may  be  allowed,  would  be  a  task  of  extremt 
difficulty.  Only  approximately  satisfactory  results  can 
be  expected.  But  it  is  believed  that  to  have  some  control 
of  this  sort  is  better  than  to  suffer  all  the  wastes  and 
inequalities  of  unregulated  competition.  If  the  general 
rule  of  the  4th  section  of  the  Interstate  Commerce  Law 
is  appUed  to  the  direct  road,  viz.,  that  no  greater  charge 
shall  be  made  for  a  shorter  haul  than  for  a  longer  one, 
over  the  same  Hne  in  the  same  direction,  when  the 
shorter  haul  is  included  in  the  longer,  then  a  per  cent. 


126    TRANSPORTATION  COSTS  OF  COMMERCE 

deviation  from  this  rule  should,  in  many  cases,  be  allowed 
to  the  longer  Hne.  As  a  matter  of  fact,  the  4th  section 
of  the  Interstate  Commerce  Law,  in  its  amended  form, 
gives  the  Interstate  Commerce  Commission  the  power 
to  prescribe,  from  time  to  time,  the  extent  to  which 
common  carriers,  subject  to  its  jurisdiction,  may  be  re- 
lieved from  the  above-stated  requirement.  The  Com- 
mission, in  the  exercise  of  the  discretion  thus  given  it  by 
law,  should,  it  is  thought,  decide  each  case  arising,  with 
due  reference  to  the  principles  above  set  forth,  and,  in 
fact,  does  decide  cases  in  the  Hght  of  some  (though  not, 
apparently,  all)  of  these  principles.'' 

The  carriage  of  a  part  of  import  and  export  traffic  by 
the  more  indirect  routes  involves  discrimination  in  favor 
of  this  traffic  by  those  routes,  as  compared  with  the  rates 
charged  upon  intermediate  traffic,  including  strictly 
domestic  traffic.  The  more  indirect  Hnes  must  discrim- 
inate if  they  would  meet  the  competition  of  the  more 
direct.  If  they  do  not  meet  this  competition,  the  direct 
lines  may  be  encouraged  to  add  to  their  plants,  when  the 
truest  economy  for  the  community  would  require  that 
some  of  the  traffic  be  carried  on  roundabout  lines.  On 
exported  grain,  for  example,  the  rate  to  Liverpool  via 
New  Orleans  or  Galveston  cannot  be  higher  than  by  way 
of  New  York,  and  if  the  water  rate  is  higher  from  New 
Orleans  to  Liverpool  than  from  New  York,  then  the  rail 
rate  to  New  Orleans  must  be  correspondingly  lower  than 
to  New  York.  Similarly,  on  imported  goods  the  rate 
over  the  longer  routes  must  be  as  low  as  over  a  shorter, 
if  any  goods  are  to  be  carried  by  the  longer  routes.  But 
the  intermediate  rates,  including  strictly  domestic  rates, 
cannot  usually  be  made  correspondingly  low.     A  certain 

^  See  Twenty-fifth  Annual  Report  of  the  Interstate  Commerce  Commission, 
igii,  pp.  22-26. 


DEFENSIBLE   PLACE   DISCRIMINATION      127 

amount  of  discrimination  on  the  longer  lines  should  some- 
times, therefore,  according  to  tht  principles  which  have 
been  here  elaborated,  be  allowed.  Providing  the  discrim- 
ination allowed  is  not  so  much  that  the  through  traffic 
is  favored  over  domestic  traffic,  by  the  more  nearly  direct 
lines,  it  is  not  uneconomical  and  does  not  involve  a  turn- 
ing of  the  country's  labor  out  of  its  natural  channels. 
For  the  foreign  producers  would  have,  in  any  case,  and 
ought  to  have,  the  advantage  of  sending  goods  to  their 
American  market  by  the  most  direct  route,  and  American 
consumers  should  have  the  advantage  of  getting  foreign 
goods  at  fair  rates  over  the  shortest  possible  route.  If 
roundabout  Hnes  are  able,  by  carrying  imported  goods  at 
the  low  rates  which  this  competition  of  direct  lines  com- 
pels, to  secure  returns  which  make  it  possible  for  the  long 
lines  to  serve  intermediate  points  more  cheaply  than  they 
otherwise  could,  or  to  serve  intermediate  points  where 
railroads  could  not  otherwise  be  built,  it  cannot  be  said 
that,  on  the  whole,  foreign  producers  are  thereby  given 
artificial  advantages  over  domestic.  Only  when  the  com- 
petition for  the  longer  distance  traffic  makes  the  rate  so 
low  compared  to  domestic  traffic,  as  to  subject  domestic 
producers  to  discrimination  even  on  the  direct  lines,  can 
we  confidently  assert  that  the  discrimination,  by  a  round- 
about line  not  completely  utilized  for  intermediate  or 
strictly  domestic  traffic,  is  uneconomical. 

§2 

Discrimination  by  the  Longer  or  Longest  Line,  when  there 
is  Competition  of  Directions  or  of  Locations 

The  principle  that,  under  certain  circumstances,  it  is 
economically  desirable  for  a  longer  hne  to  carry  goods  of 


128    TRANSPORTATION  COSTS  OF  COMMERCE 

certain  kinds,  rather  than  a  shorter  line,  and  that  the 
longer  hne  may  properly  be  allowed  to  discriminate  to 
a  certain  degree  in  order  to  do  so,  applies  not  only  when 
there  is  competition  of  routes,  but  also  when  there  is 
competition  of  directions  and  competition  of  locations. 
Suppose,  for  example,  the  railroads  AB  and  AC  leading 
to  a  common  market  A  from  the  divergent  lumber-pro- 
ducing centers  B  and  C,  the  road  AC  being  the  longer. 
(See  figure  14.)     Suppose,  also,  that  the  labor  cost  of 


M(^ 


Figure  14 

producing  lumber  at  C  is  as  great  as  at  B.  Suppose 
lastly,  that  there  is  competition  between  the  roads,  each 
to  develop  the  lumber  business  on  its  line,  i.e.  competition 
of  locations ;  or  else  that  there  is,  for  the  lumber-produc- 
ing center  on  each  road,  the  option  of  shipping  by  another 
or  other  roads  to  a  different  market,  so  that  there  is  a 
real  competition  of  directions.  Under  such  circum- 
stances, it  will  sometimes  be  more  economical  that  A 
should  receive  part  of  its  lumber  from  C  over  the  longer 
line.  It  may  be  that  the  longer  line  is  able  to  pay  much 
of  its  general  expenses  and  profits  from  local  business, 


DEFENSIBLE  PLACE   DISCRIMINATION     129 

e.g.  C  to  D.  Yet  the  through  traffic,  CioA,  will  perhaps 
pay  something  more  than  the  mere  extra  cost  of  carrying, 
and  so  will  be  worth  seeking.  To  adopt  the  principle 
that  A  should  be  served  entirely  from  the  shorter  distance 
source,  B,  is  to  insist  that,  if  necessary,  a  new  Une  from 
Bio  A  should  be  constructed  to  carry  the  B  lumber  to  A , 
even  though  this  traffic  alone  would  have  to  pay  a  much 
larger  proportion  of  general  expenses,  fixed  charges,  and 
profits  than  the  through  traffic  on  the  road  CA.  It 
might  very  well  be  more  economical  that  the  longer  line, 
CA,  which  has  intermediate  traffic  from  C  to  D,  etc.,  per- 
haps more  than  the  other  road,  and  which  may,  therefore, 
be  able  to  take  the  C  to  ^  business  for  a  little  more  than 
the  mere  terminal  and  train  mileage  expenses  incident  to 
it,  should  mainly  carry  the  required  lumber  to  ^ .  An 
exactly  parallel  argument  would  show  that  it  might  be 
preferable  for  the  road  CA  to  carry  lumber  from  CtoA, 
than  for  a  shorter  road,  having  less  intermediate  traffic, 
to  be  constructed  with  sufficient  trackage  to  carry  all 
this  C  lumber  to  some  other  and  nearer  market  where  it 
would  bring  no  higher  price. 

If,  however,  we  admit  these  points,  we  are  compelled 
to  admit  that  discrimination  on  the  longer  roads  —  but 
not  on  all  the  roads  —  may  be  justified.  The  line  CA 
must  meet  at  A  the  competition  of  an  actual  or  possible 
shorter  railroad.  A  is  entitled  to  a  price  for  lumber 
based  on  a  rate  which  such  a  road  could  give.  C  may  be 
entitled  to  a  profit  based  on  conditions  in  a  nearer  market 
and  over  another  actual  or  possible  railroad.  The  road 
CA  must,  perhaps,  make  a  low  rate  on  through  business 
or  lose  the  business.  Yet  it  cannot  afford  to  make 
equally  low  rates  on  its  intermediate  trafiic,  such  as 
that  from  C  to  D.    Nevertheless,  the  point  D  may  be, 

PART  III — K 


I30    TRANSPORTATION  COSTS   OF  COMMERCE 

on  the  whole,  helped  rather  than  hurt  by  the  possibility 
of  some  other  traffic  for  the  railroad  AC. 

§3 

Discrimination  by  the  Shorter  or  Shortest  Line,  when  Such 
a  Line  has  Comparatively  Light  Traffic 

But  there  may  be  circumstances  under  which  it  is  the 
shorter  line  rather  than  the  longer  that  may  properly  be 
allowed  to  discriminate  in  favor  of  long-distance  as 
against  intermediate  traffic.  Turning  back  to  figure  13, 
let  us  suppose  that  the  longer  Hne,  ABCD,  has  heavy 
local  traffic  and  is  therefore  able  to  charge  low  rates.  It 
may  charge  rates  between  A  and  D  which  are  higher, 
corresponding  to  the  greater  distance,  than  between  A 
and  C  or  B  and  D,  and  which  are,  therefore,  in  no  sense 
discriminatory  against  intermediate  business,  but  which 
are,  though  remunerative,  very  low  per  mile.  The  more 
direct  Hne,  A  ED,  on  the  other  hand,  may  run  through 
a  territory  which  provides,  even  with  the  addition  of 
traffic  from  A  to  D  and  D  to  A,  only  comparatively  light 
traffic,  and  this  shorter  railroad  may  therefore  be  com- 
pelled to  charge  rates  per  ton  mile  much  higher,  on  the 
average,  than  are  charged  by  the  road  ABCD.  Yet 
if  the  railroad  A  ED  charges,  on  A  to  D  and  D  to  A 
shipments,  rates  per  mile  anything  like  as  high  as  it  is 
obliged  to  charge  on  ^  to  £  and  D  to  E  traffic,  the  long- 
distance traffic  will  go  by  the  roundabout  road.  To 
carry  a  share  of  this  longer  distance  traffic,  the  Une  A  ED 
must  then  discriminate  in  its  favor. 

Let  us  look  more  fully  into  the  economic  problems 
involved.  If  the  long  Hne  is  not  discriminating  against 
intermediate  points  but  makes  the  low  longer  distance 


DEFENSIBLE   PLACE   DISCRIMINATION      131 

rates  simply  because  large  traffic  enables  it  to  make  all 
of  its  rates  low,  these  low  long-distance  rates  ought  not 
arbitrarily  to  be  raised.  The  railroad,  if  well  managed,  is 
entitled  to  a  fair  profit.  The  public,  if  large  business 
makes  such  rates  profitable,  is  entitled  to  low  rates,  and 
if  the  short  Hne,  because  traffic  on  its  rails  is  hght,  cannot 
get  a  profit  except  by  charging  higher  rates  per  mile  on 
its  non-competitive  traffic,  it  is  fairly  entitled  to  do  this. 
The  A  to  D  traffic,  however,  will  not  add  to  the  fixed 
charges  or  general  expenses  of  the  railroad  A  ED  and, 
since  the  distance  is  shorter  over  its  line  than  over  that 
of  its  rival,  the  actual  expenses  of  moving  the  traffic, 
i.e.  the  expenses  for  the  production  of  train  mileage,  are 
probably  ^  less  by  this  shorter  route.  Economic  waste 
may  therefore  be  avoided  by  encouraging  such  traffic  to 
follow  this  route  even  though  apparent  discrimination 
must  be  practiced  to  realize  that  end.  As  a  matter  of 
fact,  to  allow  the  Hne  A  ED,  under  these  assumed  cir- 
cumstances, to  make  the  lower  rates  on  its  longer  dis- 
tance traffic,  will  not  necessarily  increase,  and  may  de- 
crease, the  disadvantage  to  which  intermediate  points 
on  this  hne  are  subjected.  The  lower  A  to  D  rates 
very  hkely  would  be  made,  any  way,  by  the  longer  and 
more  fully  utilized  road,  and  probably  ought  to  be  made 
by  that  road.  The  higher  rates  on  local  traffic  are 
essential  to  the  shorter  and  less  fully  utilized  road.  If 
this  shorter  road  can  get  some  of  the  A  to  D  and  D  to  A 
business,  it  will  perhaps  be  more  able,  rather  than  less 
able,  to  reduce  its  intermediate  rates. 

Likewise,  if  the  competition  between  two  or  more  rail- 

*  Not  necessarily,  because,  as  Professor  H.  J.  Davenport  hjis  suggested  to  me, 
the  more  direct  line  may  be  constructed  for  lighter  traflSc,  with  resulting  higher 
operating  costs  per  ton  carried. 


132    TRANSPORTATION   COSTS  OF   COMMERCE 

roads  is  a  competition  of  directions  or  a  competition  of 
locations  (as  represented  in  figure  14),  there  may  some- 
times be  similar  circumstances  justifying  place  discrim- 
ination by  a  short  line. 

§4 

Discrimination  among  Places,  by  a  Railroad  Competing 
with  a  Water  Line 

Let  us  turn  now  to  another  condition  under  which 
discrimination  among  places  may  be  warranted.  Such 
discrimination  by  a  railroad  may  sometimes  be  war- 
ranted when  the  railroad  has  to  meet,  at  certain  points, 
and  not  at  others,  the  competition  of  vessels  operating 
on  free  waterways,  e.g.  the  ocean.  Consider  the  case  of 
a  railroad  joining  the  three  points  A,  B,  and  C  (see  figure 
15),  when  the  two  more  distant  points  from  each  other, 
A  and  C,  are  also  joined  by  a  water  transportation  line, 
and  when  the  intermediate  point  B  is  not.  Here  the 
railroad  ABC  will  make  relatively  low  rates  between  A 
and  C  to  meet  the  competition  of  the  water  line  AC,  but 
will  not  be  compelled  to  make,  and  probably  will  not 
make,  correspondingly  low  rates  in  proportion  to  distance 
and  cost,  or,  in  some  cases,  even  absolutely,  between  A 
and  B  or  between  B  and  C.  Is  discrimination  among 
places,  by  a  railroad,  under  such  circumstances,  economi- 
cally defensible  ? 

If  the  railroad  ABC  has  intermediate  traffic,  and  the 
water  line  has  only  the  traffic  from  .4  to  C  and  C  to  ^, 
then  we  have  a  problem  not  unlike  that  of  the  direct 
versus  the  roundabout  railroad,  when  the  latter  has  more 
intermediate  traffic.  In  our  figure,  the  water  route  is 
more  roundabout  than  the  rail  route,  but  this  may  be 


DEFENSIBLE   PLACE   DISCRIMINATION     133 

more  than  compensated  by  the  usually  lower  cost  of 
transportation  on  natural  waterways.  Yet  the  inter- 
mediate traffic  on  the  rail  line  may  make  it  the  more 
economical   route.     For  the  extra  cost  of  taking  the 


Figure  15 


through  traffic  over  the  same  railway,  since  this  extra 
cost  involves  no  greater  fixed  charges  or  general  expenses, 
may  be  less  than  the  cost,  counting  necessary  profit,  of 
carrying  the  goods  by  water.  It  will  then  be  economically 
desirable  that  the  railroad  plant  necessary  for  inter- 
mediate traffic  should  be  fully  utilized,  before  vessels 
are  constructed  to  carry  the  A  and  C  traffic,  and  that 


134    TRANSPORTATION   COSTS  OF  COMMERCE 

these  vessels  should  be  constructed  only  in  sufficient 
number  to  take  the  surplus  A  and  C  traffic. 

Are  the  conclusions  otherwise  if  the  water  transporta- 
tion company,  also,  has  a  considerable  amount  of  inter- 
mediate traffic,  A  to  D,D  to  C,  etc.  ?  There  is  a  possibil- 
ity that,  in  this  case,  the  ability  to  get  part  of  the  through 
traffic  will  enable  the  water  line,  too,  to  carry  its  inter- 
mediate traffic  more  cheaply.  Ability  to  get  both  most 
of  the  AC  traffic  and  this  intermediate  traffic  might 
make  it  possible  for  the  water  line  to  employ  and  to  fully 
utilize  larger  vessels,  and  to  realize  the  resulting  econ- 
omies. If  so,  the  discrimination  resulting  from  the  com- 
petition would  perhaps  be  practiced  by  the  water  line 
company  also,  to  the  relative  disadvantage  ol  D;  or 
else  the  railroad  might  get  all  the  through  traffic,  smaller 
vessels  might  be  used  for  intermediate  traffic,  and  rates, 
because  costs,  might  be  higher  for  D.  B  and  D  would 
both  be  subjected  to  disadvantage,  and  industries  would 
be  prevented  from  locating  in  them,  because  there  was 
competition  at  A  and  C  and  none  at  B  and  D.  The 
objections  to  unlimited  discrimination  of  this  sort  on 
both  Hues  are  the  same  as  were  previously  stated  ^  for 
discrimination  practiced  by  each  of  two  railway  lines. 
The  ideal  of  economy  is  that  any  given  block  of  traffic 
between  A  and  C  should  be  carried  by  that  line  for  which 
the  special  additional  cost  of  carrying  it  is  the  less  (or 
least).  This  may  be  the  water  line  because  of  the  greater 
average  cheapness  of  water  transportation ;  or  it  may  be 
the  rail  line  despite  greater  average  costs,  because  of  a 
less  additional  cost  (train  mileage,  etc.)  for  hauHng  the 
special  traffic  in  question. 

Very  possibly,  however,  competition  by  the  rail  line, 

1  See  §  I  of  this  Chapter  (V  of  Part  lU). 


DEFENSIBLE   PLACE   DISCRIMINATION      135 

ABC,  for  the  A  to  C  and  C  to  A  traffic,  will  not  appre- 
ciably decrease  the  size  of  ships  used  on  the  line  ADC 
but  only  their  number.  Neither  is  there  so  Ukely  to  be 
discrimination  against  D  as  against  B,  nor,  if  it  exists,  is  it 
likely  to  be  practiced  to  the  same  extent.  For  5  is  a 
monopoly  point  on  one  line,  while  traffic  to  and  from  D 
may  be  competed  for  by  any  independent  vessel.  Assum- 
ing, then,  that  competition  on  the  waterway  is  so  evenly 
distributed  as  to  prevent  much  discrimination,  we  have 
to  inquire  into  the  justification  of  discrimination  by  the 
railroad.  At  the  most,  the  railroad  could  only  drive  the 
water  Une  company  entirely  out  of  the  through  traffic 
AtoC  and  C  to  ^ .  The  traffic  to  and  from  D  would  still 
be  carried  on  the  water  in  vessels  of  about  the  same  size 
and  at  about  the  same  rates.  The  only  question  is 
whether  it  is  well  for  the  community  and  for  points  such 
as  B  and  D,  that  the  railroad  should  take  the  longer 
distance  traffic  and  should  discriminate  to  do  so. 

To  illustrate,  let  us  suppose  that  the  article  competed 
for  is  cotton,  and  that  the  cost  of  carrying  it,  per  ton, 
between  A  and  C,  by  the  water  line,  is  $1.40.  Let  us 
suppose,  further,  that,  at  a  much  lower  rate  than  this,  it 
would  not  pay  to  operate  vessels  for  the  through  traffic 
between  A  and  C ;  that  the  surplus  vessels,  after  inter- 
mediate traffic  was  provided  for,  would  seek  traffic 
elsewhere ;  and  that  at  such  low  rates,  no  new  ones  would 
be  built  for  the  A  and  C  traffic.  On  the  other  hand,  the 
cost  of  carrying  cotton  per  ton  from  ^  to  C  on  the  rail- 
road ABC  would,  we  may  assume,  if  this  freight  should 
pay  a  proportionate  share  towards  general  expenses,  fixed 
charges,  and  profits,  amount  to  $1.50,  despite  the  com- 
parative shortness  of  the  rail  route,  since,  in  general, 
water  transportation  on  free  and  open  waterways  is 


136    TRANSPORTATION  COSTS  OF  COMMERCE 

cheaper.  Nevertheless,  the  variable  expenses  for  carry- 
ing the  AtoC  traffic  by  rail,  i.e.  the  expenses  for  terminal 
services  and  for  the  production  of  train  mileage,  incident 
to  this  special  traffic,  may  be  not  more  than  $1.35  per 
ton.  Anything  over  that  may  contribute  towards 
general  expenses  and  towards  making  the  net  profits 
greater.  A  rate  of  $1.38  or  $1.39,  therefore,  would  be 
a  rate  at  which  the  railroad  would  much  rather  take  the 
business  than  lose  it. 

To  decide  whether  discrimination  by  the  railroad  is 
economically  desirable,  we  should  consider  the  interests 
of  all  places  and  transportation  companies  concerned, 
and,  therefore,  of  the  whole  community.  As  respects 
the  interests  of  the  places  A,  B,  C,  and  D,  it  is  to  be 
emphasized  that  the  traffic  between  A  and  C  will  get 
lower  rates  in  relation  to  distance  than  does  the  traffic 
between  A  and  B  and  between  B  and  C,  whether  the 
railroad  competes  or  not.  The  existence  of  the  waterway 
insures  this  discrimination,  if  it  may  properly  be  called 
such.  On  our  present  hypothesis  with  regard  to  size  of 
vessels,  the  competition  of  the  railroad  does  not  injure 
D.  There  are  no  general  expenses  for  maintaining  the 
water  route  which  now  have  to  be  borne  more  heavily  by 
D.  D  loses  only  relatively  and  in  proportion  as  A  and 
C  gain.  It  is  entirely  possible  that  the  discrimination 
against  B  would  be  greater  if  the  railroad  were  not 
allowed  to  compete.  For  then  it  would  not  have  been 
worth  while  even  to  build  such  a  road,  unless  the  inter- 
mediate traffic  1  could  bear  rates  high  enough  to  make 
business  profitable  even  if  almost  no  competitive  business 
could  be  expected.     It  is  true  that  the  railroad,  if  al- 

1  Coupled  with  what  through  trafiSc  would  seek  the  railway  by  preference 
even  at  higher  rates. 


DEFENSIBLE   PLACE   DISCRIMINATION     137 

lowed  to  add  to  its  profits  by  taking  part  of  the  yl  to  C 
and  C  to  yl  business,  might  not  merely  on  that  account 
voluntarily  make  lower  intermediate  rates.  But  so  far 
as  these  rates  are  subject  to  government  or  commission 
control,  their  reduction  could  be  secured  with  more  ap- 
parent equity  and  therefore  ease,  if  it  appeared  that 
the  railroad  could  afford  such  reduction.  From  the  point 
of  view  of  B,  therefore,  or  other  intermediate  points  on 
the  railroad  ABC,  it  would  hardly  appear  that  reason- 
able competition  by  this  railroad  for  the  through  traffic, 
should  be  opposed.  The  intermediate  rates  would  not 
suffer  in  consequence,  and  might  even,  with  effective 
government  regulation,  be  made  lower.  A  and  C  have 
something  to  gain  from  the  competition  and  nothing 
to  lose.  As  to  the  rail  versus  the  water  line,  if  the  rail- 
road can  afford  to  carry  the  freight  without  loss  and  even 
with  some  gain  to  itself,  at  a  rate  so  low  that  no  one 
would  build  vessels  to  meet  that  rate,  then,  presumably, 
investment  in  such  vessels  would  be  uneconomical. 
Those  who,  in  the  absence  of  the  railroad,  would  so  invest, 
turn  their  control  over  capital  to  other  lines,  or  to  naviga- 
tion between  other  cities,  and  it  cannot  be  said  that  they 
lose  more  than  the  railroad  company  gains.  If  it  is 
almost  worth  while  to  build  the  railroad  for  the  inland 
transportation  alone,  and  if  the  competitive  traffic, 
even  at  rates  below  what  a  water  line  could  profitably 
meet,  makes  it  entirely  worth  while, ^  then  it  is  better  to 
have  the  railroad  than  to  have  the  additional  ships 
necessary  to  carry  the  A  to  C  traffic.^    The  Federal  law 

*  Cf.  Taussig,  Principles  of  Economics,  New  York  (Macmillan),  igii,  V'ol.  II, 

p.  374- 

'  On  the  other  hand,  it  may  often  be  desirable  for  railroads  to  charge  rates  on 
trafEc  moving  short  distances,  which  pay  but  little  towards  general  expenses 
and  profits,  rather  than  have  the  goods  carried  by  wagons  or  auto-trucks.    Where 


138    TRANSPORTATION  COSTS   OF  COMMERCE 

and  the  Interstate  Commerce  Commission  in  its  interpre- 
tation of  that  law,  are  therefore  to  be  commended  for 
recognizing  water  competition  when  of  substantial 
importance,  as  possible  justification  for  discrimination 
by  a  railroad  between  places.^ 

A  good  illustration  of  the  effect  of  water  competition  is 
found  in  the  facts  brought  out  in  the  St.  Louis  Business 
Men's  League  case  decided  by  the  Interstate  Com- 
merce Commission  in  1902.^  It  appeared,  first,  that  the 
transcontinental  railroads  were  charging  much  lower 
rates  to  the  Pacific  Coast  than  to  far  western  points  not 
on  the  coast.  Even  points  a  considerable  distance  inland 
had  to  pay  higher  rates  on  goods  from  the  East  than  did 
coast  points.  The  rates  to  these  inland  points  were 
based  on  the  coast  rates.  That  is,  from  points  east  of  the 
Mississippi  or  Missouri  rivers,  rates  were  made  to  various 
far  western  points,  which  were  the  sum  of  the  competitive 
rates  to  the  coast  and  the  local  rates  back  to  those  far 
western  points.  This  situation,  the  rail  carriers  claimed, 
was  due  to  water  competition  at  the  longer  distance 
points.  From  ports  on  the  Atlantic  Coast,  goods  can 
go  to  the  Pacific  Coast  by  water  around  Cape  Horn  ;  by 
water  to  Panama,  and,  after  crossing  the  Isthmus  (or 


low  rates  are  made  for  this  reason,  such  low  rates  may  be  defensible  from  the 
viewpomt  of  national  economy,  even  though  traflBc  moving  longer  distances  has 
to  pay  more  towards  profits.  For,  unless  the  transportation  plant  is  already 
fully  utilized  by  traffic  which  is  more  profitable,  it  may  be  better  that  this  short- 
distance  traffic  should  be  taken  by  the  railroad  in  question,  already  and  properly 
there  for  the  sake  of  other  business,  than  that  additional  capital  should  be  in- 
vested in  the  other  faciHties  (trucks,  etc.)  for  conveyance. 

»  See  discussion  by  the  Interstate  Commerce  Commission  regarding  section  4 
of  the  law  in  its  present  form,  in  the  Twenty-fifth  Annual  Report  of  the  Com- 
mission, p.  26. 

» Interstate  Commerce  Reports,  Vol.  IX,  pp.  318-372.  See  also  Twenty-fifth 
Annual  Report  of  the  Interstate  Commerce  Commission,  pp.  27-41,  for  discussion 
by  the  Commission,  of  a  more  recent  case  involving  transcontinental  rates. 


DEFENSIBLE   PLACE   DISCRIMINATION     139 

going  through  the  canal,  as  will  soon  again  be  possible), 
by  water  up  the  coast ;  or  the  goods  may  go  by  rail 
across  the  United  States  or  Canada.  In  consequence 
of  the  water  competition,  the  rates  to  Pacific  Coast  ports 
must  be  low ;  but  they  need  not  be  equally  low  to  in- 
terior western  cities.  It  appeared,  second,  that  rates 
from  Pittsburg,  Chicago,  St.  Louis,  and  other  cities  east 
of  the  Mississippi  and  Missouri  rivers,  but  not  on  the 
Atlantic  Coast,  were  just  as  low  to  the  Pacific  Coast 
as  rates  from  Atlantic  ports,  but  were  no  lower.  In 
the  absence  of  water  competition,  rates  from  these  in- 
terior cities  to  the  western  coast,  would,  in  all  proba- 
bility, be  lower  than  rates  from  Atlantic  ports  to  the 
coast.  While  other  conditions  have  been  such  that 
water  competition  has  not  made  rates  from  the  Atlantic 
ports  actually  lower  than  from  these  interior  cities, 
it  has  made  them  lower  in  comparison  with  distances 
carried. 

Here,  then,  we  have  discrimination  by  railroads  in 
favor  of  that  part  of  their  traffic  which  is  subject  to 
water  competition.  Yet  if  the  railroads  must  so  dis- 
criminate to  get  the  through  business,  if  the  through 
business,  even  at  these  low  rates,  will  pay  the  extra  cost 
of  its  own  moving  and  something  towards  general  ex- 
penses and  profits,  and  if  correspondingly  low  rates  on 
all  the  intermediate  traffic  carried  cannot  be  afi'orded, 
the  competition  by  the  railroads,  if  not  carried  to  undue 
lengths,  would  appear  to  be  legitimate.^ 

*  Discrimination  to  the  same  degree  may  not  be  defensible  when  the  railroad 
in  question  is  taxed  to  its  uttermost  to  carry  the  trafGc  which  is  non-competitive 
with  any  water  transportation  company.  It  is  certainly  not  desirable,  either 
for  the  good  of  the  railroad  or  that  of  the  public,  that  intermediate  traffic,  which 
has  no  alternative  route  and  which  can  pay  reasonably  high  rates,  should  be 
refused  in  order  that  competitive  tralilc,  which  has  an  alternative  route  and  will. 


140    TRANSPORTATION  COSTS  OF  COMMERCE 

The  same  principles  apply  when  the  competition  is, 
in  part  or  in  whole,  a  competition  of  directions  or  a  com- 
petition of  locations.  In  transcontinental  business,  the 
lines  leading  from  Chicago  and  St.  Louis,  as  well  as  those 
leading  from  Boston,  New  York,  etc.,  make  lower  rates 
to  the  coast  than  to  interior  western  points.  If  they 
did  not,  goods  which  are  produced  in  Chicago  and 
St.  Louis  for  western  consumption,  and  which  go 
west  by  rail,  would  be  Hkely,  in  part,  to  be  produced 
in  Boston,  New  York,  etc.,  and  to  go  west  by  water. 
Low  rates  on  the  railroads  for  such  competitive 
traffic,  even  though  the  competition  is  not  of  routes, 
may  more  fully  utilize  railroad  plants,  may,  therefore, 
increase  railroad  profits,  and  may  add  to  railroad 
facilities  for  intermediate    points.      A  recent  decision 

therefore,  pay  only  low  rates,  should  be  taken.  If  the  raUroad  is  already  fully 
utilized,  without  the  competitive  traffic,  it  cannot  properly  seek  part  of  this 
competitive  traffic  unless  by  extending  its  plant,  —  for  example,  by  constructing 
an  additional  track.  In  such  a  case,  the  competitive  traffic  should  not  be  sought 
unless  it  will  pay,  besides  the  train  mileage  and  terminal  costs  which  it  occasions, 
a  reasonable  return  on  the  extra  capital  {e.g.  trackage)  required  (cf.  M.  O. 
Lorenz,  Constant  and  Variable  Railroad  Expenditures  and  the  Distance  Tariff, 
Quarterly  Journal  of  Economics,  Vol.  XXI,  1907,  pp.  283-298).  We  need  not 
conclude,  however,  that  no  discrimination  whatever  in  favor  of  the  competitive 
traffic  can,  under  these  conditions,  be  justified.  For  in  order  to  carry  increased 
traffic,  it  is  possible  that  the  railroad  plant  will  not  have  to  be  increased  in  the 
same  ratio.  A  two-track  railroad,  for  example,  will  carry  more  than  twice  as 
much  traffic  as  a  one-track  road.  Consequently,  even  though  the  competitive 
traffic  requires  a  greater  railroad  plant  tlian  would  be  necessary  if  this  traffic  were 
left  to  the  water  line,  such  traffic  may  not  involve,  and  if  the  size  of  plant  of 
maximum  efficiency  has  not  been  reached,  will  not  involve,  additional  cost  in 
proportion  to  its  volume ;  and  it  may  perhaps  be  carried,  with  economic  justifica- 
tion, at  rates  slightly  lower  in  relation  to  distance  than  the  rates  between  points 
not  served  by  waterways.  As  a  matter  of  fact,  the  trackage  which  is  in  any  case 
required  for  intermediate  traffic,  often  suffices,  without  increase,  for  the  competi- 
tive traffic  also.  Though  engines  and  cars  may  have  to  be  increased,  yet,  in  the 
main,  the  additional  business  sought  merely  utilizes  existing  plant  more  com- 
pletely. Also,  if  trackage  has  been  mistakenly  constructed  in  excess  of  the  needs 
of  traffic  which  can  pay  reasonable  rates,  it  may  be  better  to  accept  competitive 
traffic  which  pays  but  little  towards  profit,  than  to  refuse  it. 


DEFENSIBLE   PLACE   DISCRIMINATION     141 

of  the  Interstate  Commerce  Commission/  still  more 
recently  upheld  by  the  Supreme  Court,^  limits  the  extent 
to  which  this  discrimination  may  be  carried,  and  limits 
it  more  closely  for  lines  leading  from  the  Middle  West 
than  for  those  leading  from  the  Atlantic  Coast.  Rates 
from  Atlantic  Coast  territory  to  western  points  not  on 
the  Pacific  Coast  must  not  exceed  rates  to  the  Pacific 
Coast  by  more  than  25  per  cent.  From  Buffalo  and 
Pittsburg  territory  the  discrimination  must  not  exceed 
15  per  cent.  From  Chicago  territory  it  must  not  be  in 
excess  of  7  per  cent.^  But  the  influence  of  the  ocean 
route  is  clearly  recognized  by  this  ruHng,  and,  as  the 
above  percentages  show,  some  discrimination  is  still 
allowed.*    From  Missouri  River  points,  however,   such 

•  Interstate  Commerce  Commission  Reports,  Vol.  XXI,  pp.  329-384. 

*  See  Intermountain  Rate  cases,  234  U.  S.,  476. 

'  The  argument  has  been  advanced  that  lines  leading  from  the  middle  western 
cities  have  less  of  adequate  economic  justification  for  discriminating  in  favor  of 
traffic  to  the  coast,  because  the  competition  they  have  to  meet  is  only  or  chiefly 
that  of  markets,  i.e.  directions  and  locations  (see  the  Twenty-fifth  Annual  Report 
of  the  Interstate  Commerce  Commission,  pp.  27-41,  and  Ripley,  Railroads,  Rates 
and  Regulation,  New  York  — -Longmans,  Green,  and  Co.  — ,  191 2,  pp.  610-626). 
The  considerations  discussed  above  in  the  text  would  seem  to  justify  a  certain 
amount  of  such  discrimination,  though  not,  of  course,  an  unlimited  amount  of  it. 
It  must  be  emphasized  that  the  competition  is  none  the  less  a  competition  with 
water  lines,  because  it  is,  for  instance,  a  competition  of  locations.  It  may  be 
truer  economy  that  goods  should  go  by  rail  and,  if  they  do  go  by  rail,  it  is  prob- 
ably cheaper,  so  far  as  transportation  is  concerned,  that  they  should  be  sent  from 
the  Middle  West  than  that  they  should  go  from  the  e.xtreme  East.  Neverthe- 
less, it  is  probably  justifiable  to  require,  as  the  Interstate  Commerce  Commission 
has  done,  less  discrimination  on  the  traffic  from  the  Middle  West  to  Pacific 
Coast  points  as  against  intermediate  points,  than  on  the  traffic  from  the  East. 
For  while  it  may  be  plausibly  contended  that  rates  from  the  Middle  West  to  the 
Pacific  Coast  should  not  be  made  lower  than  those  from  the  Atlantic  Coast, 
in  view  of  the  lowness  of  the  latter  rates,  it  does  not  follow  that  to  intermediate 
far  western  points,  to  which  the  rates  from  the  East  are  not  thus  exceptionally 
low,  the  rates  from  the  Middle  West  should  not  be  lower.  Since  the  distance  is 
less,  they  probably  should  be  lower. 

*In  a  decision  of  Feb.  12,  igis,  the  Commission  modified  this  order 
somewhat,  as  to  certain  heavy  commodities  likely  to  move  by  water.     This 


142    TRANSPORTATION  COSTS  OF  COMMERCE 

as  Kansas  City  and  Omaha,  and  from  points  farther 
west,  no  discrimination  whatever  is  permitted. 

Before  this  topic  is  dropped,  a  warning  should  be 
given  against  interpreting  too  loosely  the  conclusions 
reached.  It  is  not  true  that  a  railway  is  always  justified 
in  competing  with  a  water  transportation  Une,  however 
low  rates  the  latter  can  make.  If  a  railroad,  in  order  to 
compete  with  a  water  line,  accepts  rates  below  the  actual 
additional  cost  incurred  for  loading,  hauling,  and  unload- 
ing the  trafiic  sought,  it  is  engaged  in  illegitimate  compe- 
tition at  the  expense  of  its  owners,  or  of  the  non-com- 
petitive points  it  serves,  or  both.  As  the  Interstate 
Coramerce  Commission  well  expressed  the  matter,  in  one 
of  its  early  cases,^  "Rail  rates  that  sacrifice  all  benefits 
to  the  carrier  from  the  business  in  order  to  divert  it  from 
competitors  by  water,  are  destructive  and  illegitimate 
competition.  .  .  .  When,  therefore,  a  rail  carrier  reduces 
its  rates,  to  compete  with  a  water  carrier,  below  the 
average  necessary  for  its  own  proper  uses,  it  takes  upon 
itself  the  onus  of  showing  that  the  reduction  does  not 
result  in  actual  loss,  so  as  to  impose  a  burden  on  other 
trafi&c  and  does  not  unjustly  discriminate  against  local- 
ities that  are  charged  higher  rates  on  like  traffic."  Such 
illegitimate  competition  is  likely  to  ruin  a  water  fine 
because  the  water  fine  is  less  apt  to  have  non-competitive 
business  from  which  it  can  recoup  itself.  A  railroad,  on 
the  other  hand,  can  reduce  its  rates,  engage  in  the 
competitive  part  of  its  business  at  an  actual  loss,  and,  if 
allowed  by  government  to  do  so  and  not  already  charging 

was  done  to  enable  the  railroads  more  easily  to  meet  competition  via  the 
Panama  Canal.  (See  Interstate  Commerce  Commission  Reports,  Vol.  XXXII, 
pp.  611-658.) 

1  Interstate  Commerce  Commission  Reports,  Vol.  IV,  p.  26  (pp.  1-30  for  entire 
case). 


DEFENSIBLE   PLACE   DISCRIMINATION      143 

all  the  traffic  will  bear,  shift  the  burden  to  other  and 
profitable  parts  of  its  Une.  But  successful  competition 
of  this  sort  is  not  a  proof  of  superior  efficiency  or  cheap- 
ness. It  does  not  mean  that  there  is  no  economic  waste 
in  using  the  railroad  by  preference  to  the  water  line.  It 
is  success  won  by  carrying,  temporarily,  at  rates  for 
which  the  competing  railroad  or  railroads  will  not  carry 
permanently.^  It  is  like  the  practice  of  some  capitalistic 
monopolies  or  trusts,  of  lowering  prices  in  a  given  locality, 
far  below  cost,  as  a  temporary  measure  to  drive  out  a 
competitor,  while  maintaining  elsewhere  high  prices. 
The  ruin  of  the  small  competitor  by  such  competition  is 
no  proof  that  he  cannot  produce  even  more  cheaply 
than  the  trust.^  The  Interstate  Commerce  Act  as 
amended  in  19 10  penalizes  such  illegitimate  competi- 
tion of  railroads  against  water  transportation  com- 
panies, by  providing  that  railroad  rates  reduced  on 
traffic  competitive  with  a  water  line  cannot  be  raised 
again  except  by  permission  of  the  Interstate  Commerce 
Commission,  and  that,  to  secure  this  permission,  changed 
conditions  must  be  shown  other  than  the  ehmination  of 
water  competition.^ 


1  Cf .  Report  of  Inland  Waterways  Commission,  igog,  pp.  385,  386 ;  also 
Preliminary  Report  of  National  Waterways  Commission,  igii,  p.  10  (p.  72  of 
Final  Report,  igi2). 

'  Another  illegitimate  method  of  competition  has  been  the  attempt  to  dis- 
criminate in  rail  charges,  against  shippers  using  waterways  for  a  part  of  their 
business.  It  is  asserted  (Report  of  the  Inland  Waterways  Commission,  igog, 
p.  386)  that  this  kind  of  discrimination  existed  in  France  until  the  government 
put  an  end  to  it.  Most  shippers  are  dependent  upon  railways  to  reach  at  least 
a  part  of  their  customers.  They  can  often  get  along  without  competing  water- 
ways, but  seldom  without  railways.  If  the  railways  can,  with  impunity,  deny 
them  reasonable  rates  or  fair  ser\'ice,  recalcitrant  shippers  wishing  to  use  water- 
ways can  frequently  be  brought  to  terms,  and  compelled  to  agree  to  ship  all 
their  output  by  rail. 

'  Section  4  of  the  amended  act. 


144    TRANSPORTATION  COSTS  OF  COMMERCE 

§5 

Discrimination  among  Places,  by  a  Railroad  Competing 
with  Local  Self-sufficiency 

Discrimination  among  places  can  be  defended  as 
economically  good,  in  certain  cases  where  a  railroad  is 
pitted  against  local  self-sufficiency.  Suppose  a  railroad 
from  distant  coal  fields  about  A  leads  into  a  region,  C, 
where  coal  can  be  produced,  but  at  a  somewhat  greater 
expense  than  at  A.     (See  figure  i6.)     Suppose  the  cost 

B 
k^ -% %  C 

Figure  i6 

at  C  to  be  $6  a  ton  and  at  .4,  $4.20  a  ton ;  and  suppose 
that  coal  cannot  be  produced  at  A  for  sale  in  C,  unless  the 
A  coal  producers  receive  at  least  this  $4.20.  A  lower 
price  would,  we  assume,  cause  A  producers  to  desert  the 
poorer  mines  to  such  an  extent  that  there  would  be  no 
exportable  surplus.  The  populations  at  A  and  at  C 
would  then  both  be  more  self-sufficient  than  if  A  sent 
coal  to  C,  and  received  other  goods  in  exchange.  Under 
these  assumed  circumstances  (and,  where  distances  are 
great,  similar  circumstances  may  exist  in  fact),  the  rate 
charged  for  carrying  the  coal  from  ^  to  C  cannot  exceed 
$1.80  a  ton.  The  road  ABC  must  get,  it  may  be,  on  the 
most  of  its  coal  traffic,  a  rate  corresponding  to  $2  a  ton 
for  such  a  distance  as  A  to  B.  Otherwise,  the  company 
cannot  pay  expenses  and  a  fair  profit.  Nevertheless, 
$1.80  or  even  $1.75  a  ton,  for  carrying  coal  from  A  to  C, 
will  pay  extra  costs  incident  to  moving,  and  leave  a  small 
amount  towards  other  ends. 

Under  these  circumstances,  the  railroad  is  better  off  to 


DEFENSIBLE   PLACE   DISCRIMINATION     145 

get  the  traffic.  The  consumers  at  C  have  something  to 
gain  and  nothing  to  lose  from  having  the  coal  brought 
from  A.  Any  resulting  price  reduction  benefits  them 
as  much  as  or  more  than  it  injures  producers  at  C.  The 
coal  producers  at  A ,  where,  we  assume,  natural  advan- 
tages make  the  labor  cost  of  production  lower,  gain  at 
least  as  much  business  from  the  opening  to  them  of  the 
market  at  C,  as  the  producers  at  C  lose.  Intermediate 
points,  such  as  B,  will  not  have  to  pay  any  higher  rates 
than  they  would  have  to  pay  anyway,  and  it  may  be 
possible,  because  of  the  through  traffic,  to  make  the 
rates  charged  to  the  intermediate  places  less  than  would 
otherwise  be  necessary.  Perhaps,  were  it  not  for  the 
through  traffic,  the  railroad  would  never  be  constructed, 
and  the  intermediate  points  would  fail  to  get  any  service 
at  all.  The  railroad  plant  is  more  fully  utilized  by  taking 
the  long-distance  traffic.  It  may  be  desirable,  therefore, 
that  C  should  be  supplied  with  coal  from  A  and  that  the 
railroad  ABC  should  discriminate  to  bring  about  that 
end. 

§6 

Discrimination  in  Favor  of  Export  Traffic 

We  have  seen  that  competition  between  a  number  of 
transportation  lines,  causing,  on  all  of  them,  discrimina- 
tion against  non-competitive  points,  involves  economic 
waste.  But  if  the  system  of  discrimination  exists,  the 
interests  of  any  one  line  (or  group  of  lines),  and  of  the 
territory  it  serves,  may  be  more  promoted  by  its  engaging 
in  the  competitive  traffic  at  the  rates  competition  deter- 
mines, than  by  its  relinquishing  such  trafiic  to  its  rivals. 
For  some  profit  is  better  than  none,  and  may  make 
possible  service  otherwise  unattainable  by  intermediate 


146    TRANSPORTATION  COSTS  OF  COMMERCE 

points,  or  lower  rates  than  these  points  could  otherwise 
enjoy. 

The  same  kind  of  argument  tends  to  show  that  dis- 
crimination by  the  transportation  lines  of  a  country,  in 
favor  of  goods  exported  as  against  goods  sold  in  the  home 
country,  may  be  economically  profitable  for  that  country 
even  if  unprofitable  from  the  viewpoint  of  world  eco- 
nomics. We  may  illustrate  the  various  possibilities 
of  national  gain  or  loss  by  reference  to  a  case  decided 
by  the  Interstate  Commerce  Commission  in  1899.^  It 
appeared,  in  this  case,  that  the  export  rates  upon  grain, 
not  only  through  the  Gulf  ports  (by  which  route  the 
argument  regarding  roundabout  lines  might  apply),  but 
even  through  the  Atlantic  ports,  including  New  York, 
were,  at  times,  lower  than  the  rates  upon  grain  carried 
to  the  same  ports  for  domestic  consumption.  Thus,  dur- 
ing October  of  1896,  the  rate  on  corn  from  Chicago  to 
New  York  was  20  cents  for  domestic  consumption  as 
contrasted  with  15  cents  if  for  export.  Discrimination 
of  the  same  sort  was  shown  to  have  sometimes  been 
practiced  in  favor  of  exported  wheat. 

Such  discrimination  we  may  show  to  be  a  gain  to  the 
United  States  as  a  whole,  on  the  following  hypotheses : 
first,  that  these  low  rates  cover  at  least  the  additional 
cost  incident  to  carrying  the  freight  in  question,  i.e. 
terminal  and  production-of-train-mileage  expenses  im- 
posed by  this  particular  business;  second,  that  these 
low  rates  are  all  which  the  traffic  will  bear  without  being, 

'  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  214-276.  Attention  should 
be  called  to  the  fact  that  under  section  4  of  the  original  Interstate  Commerce 
Act,  as  it  had  been  interpreted  by  the  Supreme  Court  (162  U.  S.,  197  and  168 
U.  S.,  144),  the  Commission  did  not  have  the  power  to  correct  the  discrimination 
in  favor  of  exports  complained  of.  The  amendment  of  1910  has  given  it  more 
efifective  control  over  situations  of  this  sort. 


DEFENSIBLE   PLACE   DISCRIMINATION      147 

not  merely  diverted  from  one  American  transportation 
company  to  another,  but,  so  far  as  American  railroads 
are  concerned,  in  a  considerable  degree  lost,  i.e.  that  the 
railroads  must  make  the  discriminating  rates,  to  get  the 
largest  returns  from  the  business.  Under  these  circum- 
stances, low  rates  made  on  export  wheat,  for  instance, 
by  American  railroads,  would  mean  a  net  gain. 

At  first  sight  this  discrimination  may  seem  like  a 
bounty  on  exportation.  But  there  is  a  very  distinct 
difference  which  destroys  the  value  of  any  such  compari- 
son. A  bounty  is  a  clear  loss  to  a  country's  taxpayers. 
At  their  expense,  it  turns  industry  into  a  line  which, 
otherwise,  it  might  not  follow  and  which,  therefore,  is 
likely  to  be  a  nationally  unprofitable  line  of  industry. 
But  the  discrimination  in  freight  rates,  favorable  to 
exported  goods,  is  not,  on  our  hypothesis,  a  direct  loss 
to  any  class  of  persons  in  the  community.  Even  if  any 
class  of  persons  suffers  indirect  loss  in  consequence, 
others  in  the  country  gain  as  much  or  more.  The  rail- 
roads, by  making  the  discrimination,  secure  traflac  which 
they  otherwise  could  not  get,  and  are,  therefore,  able, 
since  they  are  operated  under  a  law  of  decreasing  pro- 
portionate expense,  to  pay  greater  profits.^  The  railway 
plant  may  be,  thereby,  more  fully  utilized.  Even  if, 
without  low  export  rates,  it  would  not  pay  for  wheat 
production  to  be  carried  on  to  the  same  extent,  for  export, 
the  fact  that,  by  carrying  it  on,  the  railway  plant  already 
constructed  for  domestic  business  can  be  more  fully 
utilized,  makes  the  business  of  wheat  production  for 
export  an  economical  and  desirable  business.  If  the 
railroads  are  not  allowed  thus  to  discriminate,  within 
limits,  and  if,  in  consequence,  the  production  of  wheat 

1  Or,  if  compelled,  to  reduce  average  rates. 


148    TRANSPORTATION   COSTS  OF  COMMERCE 

for  export  is  not  carried  on,  or  is  carried  on  to  a  much  less 
extent,  then  the  raihvay  plants  will  be  likely  to  be  less 
utilized,  to  the  disadvantage  of  the  railways  of  the 
country,  and  of  the  general  public.  For  it  is  reasonably 
probable  that  any  other  industry  or  industries,  to  which 
those  who  would  have  produced  wheat  for  export  turn 
their  hands,  will  involve  less  transportation  than  the 
wheat,  and  perhaps  at  rates  no  more  profitable.  Such 
another  industry  will  be,  in  part,  production  for  a  local, 
or  at  any  rate  a  home,  market.  The  essential  fact  to 
remember,  is,  that  since  railroads  are  operated  under 
conditions  of  joint  cost,  the  carriage  of  export  grain,  even 
at  low  rates,  may  help  to  make  the  railroads  pay.  It 
may  help,  therefore,  to  make  possible  the  building  of 
railroads  where  they  might  not  otherwise  be  built,  and 
service  to  the  community,  which  might  not  otherwise  be 
available.  It  may  make  possible  a  lower  average  scale 
of  rates  ^  and  so  tend  to  facilitate  greater  development 

1  The  argument  by  which  the  sale  of  goods  abroad  by  tariff-protected  American 
manufacturing  companies  at  prices  lower  than  those  charged  at  home  for  the 
same  goods  is  sometimes  defended,  bears  a  superficial  resemblance  to  the  argu- 
ment in  favor  of  discriminating  rates  on  export  traffic.  It  is  said  that  the  prices 
at  home  of  such  manufactured  goods  may  be  no  higher,  since  the  additional  sup- 
ply produced  for  export  may  be  produced,  by  more  fully  utilizing  manufacturing 
plants,  at  less  proportionate  cost.  In  other  words,  the  lower  price  abroad  of 
American  goods,  if  made  necessary  by  the  competition  of  cheap  foreign  produced 
goods,  is  not  at  the  expense  of  the  American  consuming  public. 

But  there  is  at  least  one  very  important  difference  between  the  two  cases. 
Transportation  within  the  United  States,  and  to  the  ports  and  boundaries  of  the 
country,  must  be  provided  by  labor  carried  on  within  the  United  States  and 
by  transportation  plants  located  here.  Absolute  freedom  of  trade  would  not 
enable  us  to  utilize  the  labor  of  foreign  railway  employees  in  carrying  American 
goods  to  ports  of  export.  Our  railways  may,  indeed,  be  the  most  efficient  in  the 
world ;  but  whether  they  arc  or  not,  we  cannot  substitute  foreign  railways  for 
them.  Manufactured  goods,  on  the  other  hand,  can  be  supplied  to  us  directly 
by  our  own  labor  and  capital,  or,  if  trade  is  not  too  greatly  interfered  with,  by 
labor  and  capital  engaged  in  production  in  a  different  part  of  the  world.  An 
alternative  therefore  exists  for  us  in  the  case  of  such  goods,  that  does  not  exist 
in  the  case  of  transportation  service.     Protection  shuts  off  that  alternative. 


DEFENSIBLE   PLACE   DISCRIMINATION      149 

of  other  industries  also,  and  greater  geographical  division 
of  labor  within  the  exporting  country.  If  the  greater 
business  makes  lower  rates  a  possibility,  the  stimulus 
of  competition,  or  the  pressure  of  the  public  through  its 
commissions,  may  make  these  potential  lower  rates  actual. 
Let  us  consider  the  effects  of  this  sort  of  discrimination 
on  the  different  classes  of  Americans  concerned.  We 
may  at  once  cancel  out  the  effects  upon  American  pro- 
ducers and  upon  domestic  consumers  of  changes  caused 
on  the  price  of  grain  consumed  at  home.  If  the  railroads, 
by  low  rates  on  export  grain,  make  it  possible  for  Ameri- 
can farmers  to  get  more  for  their  wheat  sold  abroad 
(because  a  less  charge  for  transportation  is  subtracted 
from  the  foreign  prices),   and  if,   consequently,    these 

If  American  factories,  in  any  line  of  manufacture,  produce  goods  at  such  great 
expense  that  they  must  get  higher  prices  from  domestic  consumers,  in  order  to 
remain  in  business,  than  they  are  compelled  to  accept  on  that  portion  of  their 
goods  which  they  sell  in  foreign  markets,  then  it  is  probable  that,  except  for  the 
tariff,  foreign  producers  would  undersell  them  in  the  United  States,  that  their 
high  prices  at  home  are,  therefore,  at  the  expense  of  American  consumers,  and 
that  the  protected  industry  (or  industries)  is  of  the  parasitic  kind  and  should 
never  have  been  encouraged . 

Even  if  the  tariff  is,  in  any  case,  to  be  maintained  in  favor  of  a  given  line  of 
manufacturing,  it  is  not  impossible  that  the  sale  of  surplus  goods  abroad,  for 
their  bare  additional  cost  of  production  to  each  factory,  will  increase  the  price  or 
prices  which  home  consumers  must  pay.  Suppose  that  there  are  lo  domestic 
factories  of  about  the  same  capacity,  and  that  each,  in  order  fully  to  utilize  its 
capacity,  sells  ^^  of  its  total  output  abroad  at  a  low  price,  while  covering  fixed 
and  general  expenses  mainly  from  the  money  received  on  goods  sold  at  home. 
Is  it  not  evident  that  if  the  foreign  business  were  not  sought  and  if  the  home 
demand  were  taken  care  of  by  9  factories,  the  loth  not  being  built,  then  total 
manufacturing  plant  might  be  just  as  fully  utilized,  and  that  the  benefit  in  re- 
duced price  might  then  go  to  domestic  consumers?  Unless  the  size  of  plant  of 
maximum  efficiency  was  a  monopoly  size,  discrimination  in  prices  in  favor  of 
foreign  consumers  could  but  add  to  the  injury  to  home  consumers  caused  by  the 
tariff.  But  in  the  case  of  railways,  the  alternative  of  a  smaller  number  of  plants, 
though  it  may  exist,  probably  does  not  exist  to  the  same  degree.  Since  the  trans- 
portation service  required  in  each  section  of  the  country  must  be  provided  by 
transportation  lines  in  that  section,  most  of  the  existing  trackage,  perhaps  all  of 
it,  would  equally  be  present  whether  export  traffic  requiring  discriminatingly  low 
rates  were  sought  or  aot. 


ISO    TRANSPORTATION  COSTS  OF  COMMERCE 

farmers  get  higher  prices  for  the  wheat  which  they  sell 
at  home,  their  gain  from  wheat  sold  at  home  is  pre- 
sumably just  equal  to  the  consumers'  loss.  No  net 
effect  is  produced  on  the  national  wealth.^ 

Our  problem  narrows  itself  down,  therefore,  to  a  con- 
sideration of  the  effects  of  this  kind  of  rate  making,  on 
American  railroads,  and  on  American  producers  in  so  far 
as  they  are  producers  for  export.  Obviously,  a  reduction 
of  railroad  rates  on  exported  grain  could  not  injure 
American  producers.  Whatever  might  be  true  of  market 
conditions  abroad,  and  however  market  price  abroad  of 
American  wheat  might  be  determined,  reduction  of  these 
transportation  rates  would  not  reduce  the  foreign  price 
by  more  than  an  equivalent  amount.  It  could  not  induce 
or  compel  the  American  farmer  to  accept  a  net  price, 
after  subtracting  low  transportation  charges,  even  lower 
than  if  these  charges  were  high.  The  whole  difference 
between  high  and  low  transportation  rates  might  or 
might  not  be  subtracted  from  the  price  to  the  foreign 
consumer,  but,  certainly,  more  than  that  difference  the 
foreign  consumer  could  not  hope  to  gain.  To  assume  a 
greater  gain  for  the  foreign  consumer  would  be  to  as- 
sume that  the  American  farmer  would  send  more  wheat 
abroad  at  a  lower  net  price  than  at  a  higher  net  price. 
The  American  farmer,  then,  cannot  lose  by  a  reduction  in 
rates  on  wheat  for  export,  and  he  must  gain,  on  wheat 
consumed  in  the  United  States,  whatever  the  domestic 
consumer  loses.  If,  therefore,  the  railroads  in  the 
United  States  gain  enough  by  the  consequent  greater 
traffic,  to  make  the  low  export  rates  more  profitable  to 
them  than  higher  ones  would  be,  the  net  effect  is  an 

'  If  inflow  of  money,  because  of  greater  exports,  raises  other  prices,  the  effects 
are  again  two-sided,  and  the  above  conclusion  remains  true. 


DEFENSIBLE   PLACE   DISCRIMINATION      151 

increase  of  national  prosperity.  Since  the  railroads 
secure  their  larger  return  only  because  of  the  greater 
traffic,  they  can  gain  from  lower  rates  only  by  making 
wheat  production  enough  more  profitable  to  insure 
larger  crops  and  more  exportation.  In  practice,  then, 
the  low  rates  can  be  profitable  to  the  railroads  as  a  whole 
and,  therefore,  to  the  nation  as  a  whole,  only  if  the  difler- 
ence  between  low  and  high  rates  on  exported  grain  goes 
in  part  to  American  producers,  and  not  entirely  to  foreign 
consumers. 

A  parallel  argument  may  sometimes  justify  lower  than 
average  rates  for  the  carriage  of  American  goods  pro- 
duced in  the  interior  and  marketed  on  the  coast  or  other 
boundary,  when  these  goods  meet,  in  coast  or  border 
cities,  the  competition  of  like  goods  produced  abroad. 
So  long  as  these  lower  rates  cover  the  train  mileage  and 
terminal  expenses  occasioned,  and  something  towards 
general  expenses  or  profits,  American  railroads  can  better 
afford  to  carry  the  goods  than  not  to  carry  them. 
Interior  producers  and  border  consumers  may  both  be 
benefited. 

Discrimination  in  favor  of  exports  (or  of  interior-pro- 
duced goods  marketed  on  the  border)  may  easily,  how- 
ever, result  in  national  loss  to  the  country  whose  railroads 
thus  discriminate,  since  it  may  result  in  loss  to  the  rail- 
roads. The  railroads  of  a  country,  acting  by  common 
council,  would  not  make  discriminating  reductions  in 
export  rates,  which  would  reduce  their  revenues.  But 
the  same  railroads,  acting  independently,  would  and  do 
make  such  reductions,  each  fearing  diversion  of  the  traffic 
to  its  rivals.  Each  one  dares  charge  only  what  the  traffic 
will  bear  without  being  diverted}     And  since  export  traffic 

»  See  Chapter  II  (of  Part  III).  §  6. 


152    TRANSPORTATION  COSTS  OF  COMMERCE 

is  peculiarly  subject  to  competition  of  routes,  what  the 
trafl&c  will  bear  without  being  diverted  may  be  very  low 
rates.  When  the  railroads  of  a  country  are  thus  com- 
pelled, by  competition  with  each  other,  to  carry  export 
traffic  which  pays  less  than  its  proportionate  share 
towards  general  expenses  and  profits,  even  though  this 
traffic  might  be  made  to  pay  more  nearly  its  proportion- 
ate share,  there  is,  in  effect,  a  bounty  given  to  this  export 
traffic.  In  the  long  run,  if  the  loss  to  railroads,  in  revenue 
from  carrying  goods  for  export,  is  extensive,  intermediate 
rates  must  be  higher,  since  railroads  will  not  be  built 
without  reasonable  prospects  of  gain.  But  higher  inter- 
mediate rates  must  lessen  the  profits  of  internal  com- 
merce and  tend  to  discourage  it.  We  have,  then,  a 
bounty  tending  to  encourage  exports,  but  imposing 
additional  expense  on  internal  trade,  and  so  turning 
productive  effort  out  of  the  channels  it  would  naturally 
seek,  into  other  and  presumably  less  profitable  channels.^ 
If  the  low  export  rates  yield  more  towards  general 
expenses  and  profits  than  higher  ones  would  yield,  they 
are  not  analogous  to  a  bounty  or  bounties,  and  are  eco- 
nomically desirable  from  the  standpoint  of  the  exporting 
country  (though  not  from  the  standpoint  of  other  coun- 
tries producing  the  same  goods  and  competing  in  the 
same  markets) .  If  the  low  export  rates  yield  less  towards 
general  expenses  and  profits  than  higher  rates  would 
yield,  and,  at  the  same  time,  yield  less  than  their  pro- 

» To  the  argument  that  such  discriminating  rates  might  benefit  the  producers 
of  wheat  more  than  they  would  injure  the  railroads  (the  latter  being  partly  com- 
pensated by  larger  trafEc)  and  might  thus  bring  an  average  gain,  it  is  to  be  an- 
swered that  if  wheat  production  were  thus  made  more  profitable,  it  would  be 
carried  on  to  a  greater  extent,  until,  because  of  consequent  lower  prices  or  more 
intensive  cultivation,  or  both,  it  would  be,  at  the  margin,  little  or  no  more  prof- 
itable than  the  taxed  and  discouraged  industries  at  the  expense  of  which  it  was 
subsidized. 


DEFENSIBLE   PLACE   DISCRIMINATION      153 

portionate  share  towards  these  expenses  and  profits,  their 
lowness  amounts  to  a  bounty  or  bounties,  and  is  eco- 
nomically undesirable.  It  is  probable  that  only  in  rare 
cases  will  discriminatingly  low  rates  in  favor  of  export 
traffic  actually  yield  more  net  revenue  to  the  railroads 
as  a  whole,  than  reasonable  but  not  discriminatingly  low 
rates  would  yield.  It  is  probable,  therefore,  that  dis- 
crimination in  favor  of  exports  (or  in  favor  of  goods  carried 
to  border  cities  where  the  competition  of  foreign  goods 
is  met)  is  seldom  economically  desirable. 

On  the  other  hand,  exceptionally  high  rates  on  exported 
goods  are  to  some  extent  comparable,  in  their  economic 
effects,  to  high  export  duties.  If  the  goods  exported  are 
goods  which  foreigners  can  get  nowhere  else,  the  burden 
of  the  high  rates  may  be  borne  largely  by  them  and 
lower  rates  than  would  otherwise  be  charged  may  be 
thus  made  possible  on  other  traffic.  But  usually  the 
goods  can  be  secured  elsewhere,  and  the  high  rates  are 
likely  to  act  like  a  high  restrictive  export  tariff,^  in  divert- 
ing the  industry  of  the  exporting  country  away  from  the 
most  profitable  into  less  profitable  lines. 

§7 

Discriminations  between  Directions 

We  have  now  to  consider  a  kind  of  discrimination  of  a 
somewhat  different  class  from  the  discriminations  which 
we  have  so  far  discussed,  viz.,  discrimination  between 
two  opposite  directions.  Goods  are  frequently  carried, 
both  by  rail  and  water,  more  cheaply  in  one  direction  than 
the  other.  The  principal  reason  for  this  discrimination 
is  an  excess  of  freight  moving  one  way,  compared  with 

1  See  Part  II,  Chapter  IV,  §  3. 


1 54    TRANSPORTATION  COSTS  OF  COMMERCE 

the  movement  the  other.  Freight  moving  from  terri- 
tory where  industry  is  chiefly  of  the  extractive  kind 
usually  has  large  bulk  in  proportion  to  its  value.  The 
equivalent  value  in  higher  grade  goods,  which  is  carried 
back  in  exchange,  occupies  less  space.  The  cars  (or 
vessels)  returning  may  not,  therefore,  be  loaded  to  their 
full  capacity.  Often  some  returning  cars  are  not  loaded 
at  all.  Yet  they  must  be  returned,  even  if  empty  or 
partially  so,  for  the  sake  of  the  outgoing  freight.  Since 
the  cars  have  to  be  taken  back,  anyway,  and  since, 
therefore,  the  additional  cost  to  the  railway  is  relatively 
Uttle  greater  when  the  cars  are  loaded  (or  to  a  navigation 
company  when  the  vessels  are  loaded),  it  is  preferable 
to  carry  the  freight  for  a  low  charge,  rather  than  not  to 
carry  it  at  all.  If  there  is  private  monopoly  or  govern- 
ment ownership,  the  excess  of  empty  cars  going  in  a  given 
direction  may  not  lead  to  discrimination  in  rates,  favoring 
that  direction,  though  it  is  likely  to  have  this  effect,  as 
to  some  of  the  business,  even  then ;  but  if  there  is  com- 
petition, such  discrimination  will  certainly  be  practiced. 
The  return  trips  will  be  the  problem.  Each  company 
will  be  ready  to  make  very  low  rates,  if  necessary,  on  the 
back  hauls,  rates  which  do  not  even  cover  the  cost  of  the 
trips,  so  long  as  these  rates  more  than  cover  the  extra 
cost  of  moving  loaded  cars,  over  that  of  moving  empties ; 
for  otherwise  the  other  road  or  roads  will  get  the  business. 
The  freight  going  in  one  direction  may  so  tax  the  facili- 
ties of  all  the  roads  that  rates  on  this  freight  will  be 
fairly  high  ;  while  the  scarcity  of  freight  to  be  carried  in 
the  opposite  direction,  relative  to  facilities,  will  induce 
intense  competition  and  make  rates  very  low.  So,  in 
ocean  transportation,  if  a  country  exports  a  large  quantity 
of  bulky  goods  and  imports  relatively  less,  outgoing  rates 


DEFENSIBLE   PLACE   DISCRIMINATION      155 

will  be  high,  and  rates  of  transportation  on  imports  low. 
In  the  opposite  situation,  a  country's  imports  will  cost 
more  to  carry  and  its  exports  somewhat  less.^ 

It  is  economically  desirable,  on  the  whole,  that  such 
discrimination  should  take  place.  It  cannot  be  said  that 
discrimination  in  directions  is  arbitrary  or  in  violation 
of  the  principles  of  cost.  For  the  cars  (or  ships)  would 
have  to  be  taken  to  destination  and  back  again,  even  if 
freight  moved  in  but  one  direction.  If  some  freight 
can  be  got  to  move  the  other  way,  it  must  be  admitted 
that  part  of  the  cost  —  so  much  as  would  be  required  to 
return  the  cars  empty  —  is  joint,  or  even  pertains  to  the 
movement  in  the  direction  of  the  bulkier  traffic.  It 
would  have  to  be  met  anyway,  and  cannot  properly  be 
said  to  be  due  to  the  taking  of  return  freight.  Freight 
moving  in  the  direction  which  the  empty  cars  have  to 
take  should  be  carried  at  rates  little  above  the  difference 
between  the  cost  of  hauling  the  cars  empty  and  the  cost 
of  hauling  them  full,  plus  terminal  expenses,  etc.,  rather 
than  to  be  refused.  Not  to  carry  such  freight  is  to  waste 
labor  and  facilities  which  might  be  utilized,  and  to  leave 
less  than  it  might  be,  the  total  national  wealth.  On  the 
other  hand,  freight  moving  in  the  opposite  direction,  to 
the  extent  that  it  involves  hauling  cars  (or  taking  ships) 
which  must  return  empty,  really  imposes  upon  the  labor 
force  of  the  community  the  cost  of  hauling  the  cars  both 
ways,  and  should  not  be  taken  at  rates  less  than  sufficient 
to  cover  this  cost.  Otherwise,  freight  may  be  carried 
for  less  gain  to  the  community  than  it  imposes  cost  upon 
the  community.  If,  therefore,  there  is  so  much  freight 
ready  to  go  in  one  direction  even  at  rates  which  pay 

1  Cf.  J.  R.  Smith,  The  Organization  of  Ocean  Commerce,  Philadelphia  (Publi- 
cations of  the  University  of  Pennsylvania),  igos,  p.  17. 


iS6    TRANSPORTATION  COSTS  OF  COMMERCE 

enough  to  cover  the  return  haul  of  the  cars  empty,  that 
returning  freight  cannot  be  secured  at  the  mere  addi- 
tional cost  of  hauling  loaded  cars,  to  fill  these  empties, 
then  no  freight  ought  to  be  taken  in  the  direction  of  the 
denser  traffic,  which  will  not  cover  the  return-of-cars 
cost,  nor  can  be  so  taken  without  risk  of  economic  waste. 
So  far  as  discrimination  of  directions  causes  a  greater 
equalization  of  opposite  flows,  it  serves  to  utilize  more 
fully  the  facilities  which  are  utilized  at  all,  without  pro- 
portionately increased  expense,  and  so  makes  the  national 
capital  and  labor  force  more  productive. 

§  8 
Summary 

In  this  chapter  our  concern  has  been  mainly  with 
discrimination  between  places,  in  so  far  as  this  discrim- 
ination can  be  defended,  on  economic  grounds,  as  con- 
ducing to  national  prosperity.  We  saw,  first,  that  dis- 
crimination by  a  roundabout  line  in  favor  of  through 
traffic  and  against  intermediate  traffic,  might  be  eco- 
nomically defensible.  It  may  be  the  truest  economy 
that  some  of  the  through  traffic  should  go  by  a  round- 
about line,  yet  this  through  traffic  is  entitled  to  rates  as 
low  as  a  more  direct  line  could  profitably  make.  Also, 
though  the  roundabout  line  cannot  always  afford  to 
make  correspondingly  low  rates  on  intermediate  traffic, 
it  may  be  to  the  advantage  of  intermediate  cities  on  its  line 
that  it  should  take  the  through  traffic  at  rates  which  at 
least  help  pay  general  expenses  and  profits.  The  pos- 
sibility of  getting  part  of  the  competitive  traffic  encour- 
ages the  building  of  roundabout  hnes  which  bring  inter- 
mediate points  into  touch  with  the  competitive  points. 


DEFENSIBLE   PLACE   DISCRIMINATION     157 

But  when  charges  on  competitive  traffic  are  so  low  as 
to  necessitate  discrimination  against  intermediate  traffic 
on  direct  roads  as  well  as  indirect,  there  is  economic 
waste,  and  competitive  points  are  receiving  advantages 
to  which  they  are  not  properly  entitled.  If  government 
regulation  is  to  attempt  to  raise,  in  this  regard,  the  plane 
of  competition,  the  ideal  is  to  prohibit  discrimination 
against  intermediate  points  on  direct  roads,  while  allow- 
ing roundabout  roads  to  discriminate  to  a  limited  degree. 
The  aim  should  be  so  to  balance  the  limitations  on  com- 
peting roads  as  not  to  interfere  with  the  economical 
routing  of  freight  or  with  the  building  of  roundabout 
lines  in  cases  where  these  are  more  needed.  In  no  case 
should  a  roundabout  line  be  allowed  to  carry  competitive 
traffic  for  less  than  the  additional  cost  involved,  or  to 
make  rates  on  non-competitive  traffic  so  high  as  to  get 
more  than  a  reasonable  return,  from  that  traffic  alone, 
on  the  capital  required  for  it.  In  many  cases  the  dis- 
crimination allowed  to  the  roundabout  line  should  be 
much  less.  The  carrying  of  a  part  of  import  and  export 
traffic  by  roundabout  routes  may  be  defended  as  not 
economically  bad,  even  though  it  involves  relatively 
discriminating  rates  by  these  longer  routes  in  favor  of 
import  and  export  freight. 

But,  on  the  other  hand,  if  traffic  on  a  direct  road  is 
relatively  light,  so  that  its  average  rates  must  be  high, 
while  a  more  roundabout  road  has  heavy  traffic  and  low 
rates,  the  direct  road  may  be  the  one  which  should  be 
allowed  to  discriminate  in  order  that  it  may  carry  a  share 
of  competitive  traffic. 

Discriminating  rates  by  a  railroad  or  railroads  may 
be  justifiable  in  cases  where  the  low  rates  favor  points 
competitive  with  water  lines  as  against  points  situated 


158    TRANSPORTATION  COSTS  OF  COMMERCE 

on  rail  lines  only.  The  railroad  plant  is  desired  for  the 
intermediate  traffic  alone.  The  additional  cost  of  carry- 
ing competitive  traffic  which  could  go  by  water  may  be 
so  Uttle  that  it  is  more  economical  to  carry  it  by  rail  than 
to  construct  the  additional  ships  necessary  to  carry  it. 
A  consideration  of  the  effect  of  this  discrimination,  on  the 
various  interests  concerned,  strengthened  our  conclusion 
that  such  discrimination  might  often  be  defensible  and 
even  desirable.  Its  practice  is  seen  in  the  case  of  trans- 
continental rates  made  by  American  railroads,  favoring 
coast  to  coast  and  nearly  coast  to  coast  transportation 
as  against  intermediate.  But  a  railroad  which  carries 
goods  for  less  than  the  bare  additional  cost  of  so  doing, 
in  order  to  ruin  a  competitor  by  water,  is  engaged  in 
illegitimate  competition. 

Discrimination  may  sometimes  be  practiced  with  desir- 
able results  in  favor  of  transportation  which  is  competi- 
tive with  local  self-sufficiency.  If  goods  can  be  carried  to 
a  given  point  and  sold  there  for  less  than  the  cost  of  local 
production,  there  is  a  saving,  even  though  these  goods 
pay  very  little  more  than  the  special  cost  incident  to 
their  transportation,  i.e.  even  though  they  contribute 
very  Httle  towards  general  expenses  and  profits.  If  the 
plant  is  there,  it  is  better  to  utiHze  it  on  these  terms  than 
not  to  utiHze  it. 

The  total  wealth  and  income  of  a  nation  may  be 
increased,  under  certain  circumstances,  if  its  railroads 
discriminate  in  favor  of  export  traffic,  or,  hkewise,  in  favor 
of  traffic  to  border  cities  where  the  competition  of  im- 
ported goods  is  met.  Such  discrimination  is  advanta- 
geous when  the  lower  rates  yield,  for  native  railroads  taken 
as  a  whole,  so  much  larger  traffic  than  higher  rates,  as  to 
make  the  net  earnings  of   transportation  greater.     To 


DEFENSIBLE   PLACE   DISCRIMINATION      159 

thus  increase  the  export  business  of  the  railroads,  the 
lower  rates  must  yield  some  benefit  to  producers  for 
export.  So  far  as  diversion  of  the  goods  to  a  foreign 
market  raises  domestic  prices  of  those  goods,  domestic 
producers  gain  as  much  as  domestic  consumers  lose. 
There  is  a  net  national  gain,  though  rival  producing 
countries  may  lose.  But  when  competition  between  a 
country's  railroads  brings  discrimination  in  favor  of  ex- 
port trafhc  which  would  otherwise  yield  larger  returns, 
the  discrimination  amounts  to  a  bounty  on  exports  at 
the  expense  of  the  railroads  and,  perhaps,  ultimately, 
at  the  expense  of  other  trade.  Industry  is  turned  from 
more  to  less  desirable  channels.  Discrimination  against 
exports,  unless  the  exporting  country  is  the  only  con- 
siderable source  of  supply,  is  likely  to  interfere  with  a 
profitable  export  trade,  and  turn  the  nation's  industry 
into  less  profitable  lines. 

Discrimination  between  two  opposite  directions  may 
result  from  an  excess  of  bulky  traffic  moving  in  one  direc- 
tion, over  that  moving  in  the  reverse  direction.  This 
discrimination  is  economically  desirable,  within  reason- 
able limits,  since  it  causes  fuller  utilization  of  the  facil- 
ities required.  When  cars  (or  vessels)  must  be  taken  to  a 
given  point,  whether  empty  or  full,  it  is  better  to  accept 
traffic  at  Httle  more  than  the  added  cost  of  taking  them 
full,  than  to  refuse  this  traffic. 


CHAPTER  VI 
Relative  Rates  on  Different  Goods 


Why  Rates  on  Competing  Goods  should  be  in  Proportion 
to  Transportation  Cost 

Having  completed  our  discussion  of  local  discrimina- 
tion, we  have  now  to  consider  discrimination,  if  we  may 
here  also  use  the  term,  in  the  rates  charged  for  carrying 
different  kinds  of  goods.  As  in  the  two  previous  chap- 
ters, we  shall  apply  the  test  of  general  economic  welfare 
to  transportation  practices. 

It  is  not  always  easy  in  any  given  case,  perhaps  not 
always  possible,  to  decide  how  much  one  kind  of  goods 
should  be  charged,  relatively  to  the  charge  made  for 
carrying  other  kinds.  Nevertheless,  we  can  lay  down 
important  principles  to  which  the  relation  of  rates  should 
conform.  In  looking  at  the  matter  of  relative  rates 
among  different  goods,  from  the  point  of  view  of  general 
community  welfare,  the  following  principles  are  those 
which,  it  is  believed,  should  be  kept  particularly  in  view. 
In  the  first  place,  the  rates  charged  should  be  such  as 
will,  all  things  considered,  get  industry  into  and  keep  it 
in  the  most  profitable  lines  or  channels.  Second,  the 
rates  charged  should  lead  to  the  most  economical  loca- 
tion of  each  kind  of  industry.  In  the  third  place,  these 
rates  should  be  the  ones  which  will  result  in  the  com- 

i6o 


RATES  ON  DIFFERENT  GOODS  i6i 

pletest  profitable  utilization  of  the  transportation  plant. 
Let  us  consider  these  principles  in  this  order. 

That  industry  may  be  kept,  on  the  whole,  in  the  most 
profitable  lines,  some  regard  must  be  had,  in  carrying 
goods,  to  the  cost  of  carrying.  A  transportation  com- 
pany will  naturally  consider  costs  of  carriage  in  fixing 
its  rates,  even  though  part  of  these  costs  cannot  be 
allocated.  At  least  it  will  refuse  to  transport  any 
goods,  during  any  considerable  period,  for  less  than 
the  special  or  additional  cost  incident  to  carrying 
them.  Many  things  will  pay  more.  But  nothing  will 
pay  less.  Cost  of  transportation  is,  therefore,  one  ele- 
ment in  fixing  the  relative  charge  on  different  kinds  of 
goods. 

Under  the  head  of  cost  come  many  special  considera- 
tions, for  example,  the  hazardous  nature  of  the  service. 
Upon  such  articles  as  gunpowder,  dynamite,  nitro- 
glycerine, etc.,  higher  rates  are  likely  to  be  charged  than 
upon  many  articles  of  similar  size,  weight,  and  value, 
which  are  non-explosive.  Not  only  may  the  explosives 
themselves  be  destroyed  in  transit,  but  they  may  de- 
stroy other  property.  The  greater  risk  in  carrying  them 
is  in  the  nature  of  a  cost. 

Space  occupied,  or  size  and  bulk  of  freight  carried,  is 
another  factor  in  cost.  Even  if  the  goods  to  be  carried 
are  extremely  Hght,  the  fact  that  they  require  large 
space  necessitates  the  use  of  cars  in  perhaps  consider- 
able numbers.  This  means  that  a  considerable  weight 
of  trucks,  car  floors,  walls,  etc.,  must  be  carried  to  accom- 
modate the  freight.  It  means,  also,  that  the  car  repair 
account  will  be  larger,  as  well  as  that  more  cars  are  re- 
quired on  which  interest  should  be  earned.  It  follows 
that  space  occupied  determines,  in  part,   the  cost  of 

PART  lU  — M 


i62    TRANSPORTATION  COSTS  OF  COMMERCE 

carriage.  The  weight  of  goods  to  be  carried  is,  of 
course,  also  a  factor  in  cost,  and  tends  to  affect  the 
rates  charged.  Goods  which  are  Hable  to  spoil  in 
transit,  or  which,  for  any  other  reason,  require  special 
care,  cost  more  to  carry.  All  these  elements  should 
and  largely  do  influence  railroad  ofi&cials  in  their  classi- 
fications of  freight. 

A  special  case  is  found  in  the  shipment,  on  water 
routes,  of  goods  which  can  be  used  as  ballast.  Such 
goods  serve,  in  part  at  least,  as  an  assistance  (by  steady- 
ing ships)  in  the  carriage  of  other  goods.  By  so  doing 
they  may  be  said  to  partly  pay  their  own  cost  of  trans- 
portation, and  the  net  cost  of  carrying  them  may  be 
said  to  be  low.  A  low  rate  of  transportation  can,  there- 
fore, be  afforded  by  ship-owning  companies  on  such 
goods.  British  coal  is  said  to  be  thus  carried,  as  ballast 
cargo,  at  low  rates.^ 

The  principle  that  rates  should  be  such  as  to  keep 
industrial  effort  in  the  channels  most  profitable  to  the 
community  requires  that  rates  on  different  commodities 
shall  be  in  reasonable  proportion  to  cost  of  carrying, 
whenever  these  commodities  can  be  regarded  as  com- 
peting goods,  i.e.  as  goods  which  may  be  substituted  for 
each  other  by  consumers  or  other  purchasers.  Examples 
are  PearUne  and  laundry  soap,^  Wheatena  and  Cream 
of  Wheat,  brick  and  stone  for  building.  It  will  be  seen 
that  if  the  cost  of  carriage  is  the  same,  a  higher  charge 
for  carrying  stone  than  for  carrying  brick  may  involve 
economic  waste,  since  it  may  cause  brick  to  be  used  for 
building  in  places  where  stone  would  be  on  other  accounts 

» J.  R.  Smith,  The  Organization  of  Ocean  Commerce,  Philadelphia  (Publica- 
tions of  the  University  of  Pennsylvania),  1905,  p.  17. 

*  See  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  465-479. 


RATES  ON  DIFFERENT  GOODS  163 

more  desirable.  If  the  higher  rates  merely  paralleled  a 
higher  labor  cost  of  transportation,  uneconomy  could 
not  be  alleged,  since  these  rates  would  but  bring  to  the 
attention  of  builders  a  real  economic  disadvantage  of 
using  stone.  Without  the  higher  rates,  the  public 
would  be  unduly  encouraged  to  use  materials  which,  in 
so  far  as  transportation  is  concerned,  cost  more  than 
others.  But  if  the  economic  disadvantage  does  not  exist, 
rates  which  make  it  seem  to  exist,  and  which  make 
men  act  as  if  it  existed,  are  economically  bad.  The  de- 
cision what  to  use  among  competing  goods,  and  there- 
fore how  much  of  each  kind  of  such  goods  should  be 
produced,  and,  therefore,  the  lines  oj  production  which 
industry  should  follow,  ought  to  be  determined  on  the 
basis  of  all  the  advantages  and  disadvantages  of  each 
kind  of  such  goods,  including  cost  of  production  and  cost 
of  carriage.  In  order  that  all  of  these  elements  may 
enter  properly  into  the  consideration  of  the  users,  and 
so  exercise  their  due  influence  on  the  lines  of  activity  of 
the  producers,  the  users  should  be  charged  for  each 
kind  of  goods  proportionately  to  the  actual  labor  (and 
waiting)  costs,  including  transportation,  of  providing  them 
with  the  goods,  just  as  the  consumers  realize  gains  from 
these  goods  proportionately  to  the  serviceabiUty  of  each. 
Section  3  of  the  Interstate  Commerce  Law  prohibits  un- 
due discrimination  not  only  in  favor  of  any  locality  or 
person  but  also  in  favor  of  any  particular  description  of 
trafl&c.  In  determining,  in  any  specific  case,  whether 
the  discrimination  complained  of  is  undue,  the  Inter- 
state Commerce  Commission  does  not  fail  to  consider 
the  competitive  relations  of  the  goods  discriminated 
against.^ 

Uhid. 


i64    TRANSPORTATION  COSTS  OF  COMMERCE 


The  Proper  Relation  of  Rates  on  FinisJied  Products  to 
Rates  on  Raw  Materials 

In  order  that  there  may  be  the  most  economical  loca- 
tion of  different  manufacturing  industries,  regard  must 
be  had  to  the  relative  charges  on  raw  material  and  on 
finished  product.  For  example,  consider  the  rates  on 
wheat  compared  with  those  on  flour  and  the  rates  on 
lumber  compared  with  those  on  furniture.  If  the  trans- 
portation charge  on  wheat  from  the  West  were  much 
lower  than  the  charge  for  transporting  flour,  then  all 
the  milling  of  flour  for  eastern  use  would  be  done  in  the 
East.  In  the  Export  Rate  case,^  it  was  shown  that  the 
rate  on  wheat  for  export  was  considerably  lower  than 
on  flour.  This  would  tend  to  stimulate  milling  abroad, 
since  it  would  be  cheaper  to  pay  the  low  rate  on  wheat 
than  the  high  rate  on  flour.  On  the  other  hand,  a  much 
lower  rate  on  flour  than  on  wheat  from  the  West 
would  perhaps  ruin  eastern  millers  and  cause  flour  to  be 
manufactured  almost  entirely  near  the  wheat  fields. 
The  milling  should  be  done,  of  course,  where  all  the  facili- 
ties and  conditions,  including  actual  labor  cost  of  trans- 
porting the  wheat,  and  cost  of  transporting  the  flour, 
are  the  most  favorable  in  relation  to  the  faciUties  and 
conditions  for  other  industries.  The  transportation 
companies  should  not  unreasonably  discriminate  in  favor 
of  either  the  wheat  or  the  flour.  Flour  has  more  value, 
and  may,  therefore,  involve  greater  risk  of  loss.  Pos- 
sibly the  cost  of  carrying  may  be  greater.^  It  may  be 
permissible  that  the  charge  for  transporting  flour  should 

'  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  214-276. 
*  Ibid.  pp.  244-246. 


RATES   ON  DIFFERENT  GOODS  165 

be  somewhat  greater  than  the  charge  for  transporting 
wheat.  But  if  so,  it  should  be  greater  only  to  the  extent 
that  such  special  facts  justify.  Such  is  the  position 
which  the  Interstate  Commerce  Commission  takes  in 
applying  the  law  to  specific  cases. ^ 

Perhaps  a  sharper  distinction  between  raw  material 
and  finished  product  is  found  in  the  case  of  lumber  and 
furniture.  Furniture  is  much  more  valuable  and  is  more 
liable  to  breakage.  It  occupies,  generally,  more  space  in 
proportion  to  its  weight.  A  higher  charge  on  the  furni- 
ture is  therefore  entirely  proper.  But  the  relation  be- 
tween the  charges  for  lumber  and  furniture  transpor- 
tation should  not  be  more  favorable  to  lumber  than  such 
considerations  warrant. 

§3 

When  Rates  may  Properly  be  Lower  on  Some  Kinds  of 
Goods  than  on  Others^  in  Relation  to  Cost  of  Carriage 

We  have  now  to  give  attention  to  the  third  test  of 
relative  rates  charged  for  carr}dng  different  goods,  viz., 
the  question  of  completest  utilization  of  transportation 
plant.  The  desirability  of  utilizing  transportation  plant 
as  completely  as  possible  may  justify  a  lower  rate  on 
the  product  of  one  industry  than  on  the  product  of  an- 
other, even  though  the  special  or  additional  cost  inci- 
dent to  carrying  them  is  the  same  for  both.  For  the  one 
kind  of  goods  may  require  a  low  rate  in  order  that  it 
shall  be  carried  at  all  for  any  great  distances,  while  the 
other  kind  may  be  able  to  pay  a  higher  rate.  Thus,  a 
high  rate  to  a  given  place,  on  goods  which  could  be  pro- 
duced locally,  would  mean  that  the  transportation  com- 


1 66    TRANSPORTATION  COSTS  OF  COMMERCE 

pany  charging  such  rates  might  get  no  traffic  at  all  in 
those  goods,  whereas  it  could  charge  reasonably  high 
rates  upon  goods  which  had  to  be  secured  from  else- 
where, without  sacrificing  traffic.^ 

Even  some  goods  which  are  not  locally  producible 
may  have  to  be  brought  to  a  market  cheaply,  because 
otherwise  locally  produced  substitutes  will  be  used. 
The  rate  on  building  stone  carried  to  a  given  locality 
may  need  to  be  low  because  brick  can  be  produced  there, 
and  because,  consequently,  if  the  rate  on  building  stone 
is  not  low,  it  cannot  be  carried.  The  low  rate  makes 
possible  a  larger  total  traffic,  a  more  complete  utiliza- 
tion of  transportation  plant ;  and,  therefore,  if  the  rate 
charged  pays  anything  above  the  special  cost  of  carry- 
ing, the  traffic  is  worth  while.  It  is  better  that  some 
goods  should  be  carried,  even  at  less  than  average  rates, 
if  the  charge  amounts  to  something  over  the  special 
cost  of  carrying,  than  that  these  goods  or  substitutes  for 
them  should  be  produced  locally,  and  the  transportation 
plant  be  incompletely  utilized.  The  revenue  so  yielded 
to  transportation  companies  makes  possible,  if  they  will 
it  or  can  be  compelled  to  it,  lower  charges  for  the  carry- 
ing of  other  goods,  than  they  could  else  afford;  or  it 
makes  possible,  because  profitable,  the  construction  of 
transportation  lines  which  otherwise  would  not  pay, 
and,  therefore,  makes  possible  transportation  service  for 
other  goods  also,  between  points  where  such  service 
would  not  otherwise  exist. 

An  analogous  argument  applies,  to  some  extent,  in  de- 
fense of  low  rates  on  railroads  favoring  goods  which  are 
especially  likely  to  go  by  water.  For  if  a  railway  plant 
is  necessary,  anyway,  between  two  given  points,  and  is 

1  Cf.  Chapter  V  (of  Part  III),  §  S- 


RATES  ON  DIFFERENT  GOODS  167 

desired  for  certain  kinds  of  through  traffic,  it  may  be 
better  to  use  it  for  some  other  through  traffic  also,  rather 
than  to  invest  additional  social  capital  in  ships. ^ 

There  is  nothing  in  the  above  conclusions  inconsistent 
with  the  conclusion  reached  earlier  in  the  chapter,  that 
arbitrary  discrimination  between  goods  is  uneconomical. 
Lower  rates  proportionate  to  special  cost  of  carriage, 
on  stone  for  example,  than  on  most  other  things,  have 
been  justified  only  if  they  increase  traffic  without  pro- 
portionately increasing  cost.  Lower  rates  on  building 
stone,  proportionate  to  special  cost  of  carrying,  than  on 
brick,  between  two  given  points,  would  not  thereby  be 
justified,  since  such  a  relationship  of  rates  would  prob- 
ably mean,  not  that  more  goods  would  be  transported, 
but  that  building  stone  would  be  carried  instead  of  brick. 
Lower  rates  on  both  than  on  most  other  goods,  necessi- 
tated by  a  possibility  of  local  production  of  either,  would 
be  justified.  The  question  to  be  considered  in  each  case 
is  whether  total  traffic  is  considerably  increased,  or 
whether  freight  of  one  kind  is  substituted  for  freight  of 
another  kind.  In  some  cases,  of  course,  goods  are  used 
for  different  purposes,  but  are  substitutes  to  a  limited 
extent.  Rates  should  then  be  fixed  with  reference  to 
both  the  above  principles  and  with  a  view  to  a  balance 
of  advantages. 

Similarly  in  the  case  of  relative  charges  on  raw  ma- 
terial and  finished  product.  Except  in  so  far  as  there 
may  be  non-transportable  waste,  discrimination  in  favor 
of  either  cannot  be  expected  to  result  in  larger  total 
traffic,  but  only  in  traffic  of  one  kind  instead  of  traffic 
of  another  kind.  High  rates  on  flour  mean  that  wheat 
will  be  transported  instead.    High  rates  on  wheat  mean 

»  Ibid.,  §  4. 


1 68    TRANSPORTATION   COSTS  OF   COMMERCE 

that  flour  will  be  transported  instead.  The  situation  is 
compHcated,  of  course,  in  the  case  of  certain  materials, 
such  as  leather,  which  are  raw  material  for  many  dif- 
ferent articles,  e.g.  shoes,  suit  cases,  harness,  etc.  Since 
the  leather  is  raw  material  for  one  of  these  uses  only  to  a 
limited  extent,  the  transportation  rate  may  properly  be 
determined  in  part  by  other  considerations  than  its 
relation  to  a  single  finished  product. 

But  considerations  regarding  utilization  of  transpor- 
tation plant  may  justify,  in  some  cases,  somewhat  lower 
rates  per  ton  on  raw  material  than  on  finished  goods, 
even  though  the  special  or  additional  cost  per  ton,  in- 
curred because  of  carrying  the  raw  material,  is  no  less. 
Suppose  that,  in  the  production  of  certain  kinds  of 
finished  goods,  much  of  the  raw  material  necessarily 
goes  to  waste,  so  that  the  total  weight  of  material  is 
much  less  after  the  process  of  manufacture  is  complete. 
The  same  rate  per  ton  on  the  finished  goods  as  on  the 
raw  material  would  then  encourage  manufacture  of  these 
goods  near  the  source  of  the  raw  material,  instead  of 
near  markets  far  distant  from  the  raw  material.  A 
transportation  company  could,  however,  in  some  cases, 
well  afford  to  make  somewhat  lower  rates  per  ton  on 
the  raw  material,  if,  by  so  doing,  it  could  get  the  much 
larger  number  of  tons  to  carry.  The  result  would  be  a 
more  complete  utilization  of  transportation  plant  and  a 
greater  net  profit.  The  rate  on  raw  material  should  be 
high  enough  so  that,  if  more  of  it  has  to  be  transported, 
the  total  charges  would  be  greater  by  enough  to  cover 
the  greater  special  cost  of  its  transportation.  In  other 
words,  the  rate  on  the  raw  material  should  at  least  be 
high  enough  so  that  the  net  profit  from  its  transporta- 
tion would  be  as  great  as  it  would  be  if  the  finished 


RATES  ON  DIFFERENT  GOODS  169 

product  were  carried  instead.  Otherwise  the  manu- 
facturing industry  served  would  tend  to  be  located  far 
from  the  raw  material,  at  the  expense  of  the  transporta- 
tion line  and  at  a  greater  labor  cost  for  transportation, 
even  though  the  far  location  offered  no  advantages 
sufficient  to  counteract  this  loss.  If  the  manufacturing 
industry  itself  had  to  bear  this  transportation  labor  cost 
in  the  freight  rates  it  paid,  it  would  not  locate  far  from 
the  raw  material  needed,  except  for  compensating 
advantages.  But  to  make  the  charge  for  transporting 
raw  material  as  great  per  ton  as  for  transporting  the 
finished  product,  when  to  do  so  means  to  get  a  less  total 
traffic,  may  unduly  stimulate  the  location  of  manufac- 
turing near  the  raw  material  under  circumstances  such 
that,  all  things  considered,  including  the  matter  of 
utilization  of  transportation  plant,  location  of  some 
factories  near  markets  far  away  from  the  source  of  raw 
material  would  be  more  economical. 

The  desirability  of  utilizing  the  transportation  plant 
is  the  consideration  which  justifies,  economically,  rela- 
tively lower  rates  on  cheaper  goods  and  relatively  higher 
rates  on  more  valuable  goods, ^  when  the  special  or 
additional  cost  of  carrying  them  {i.e.  terminal  and  train 
mileage  costs  incident  to  taking  them)  is  the  same  for 
both.  Valuable  goods  can  usually  be  charged  more  by 
bulk  or  by  weight,  without  the  price  of  these  goods  being 
raised  by  any  appreciable  per  cent.,  and,  therefore,  with- 
out the  sale  of  the  goods  in  distant  markets  being  de- 
stroyed or  seriously  limited.  But  rates  on  coal,  lumber, 
brick,  stone,  and  other  low-grade  goods  cannot  be,  for 

*  Hadley,  Railroad  Transportation,  New  York  (Putnam),  1885,  p.  112; 
Ripley,  Railroads,  Rales  and  Regulation,  New  York  (Longmans,  Green,  and 
Co.),  1912,  p.  no. 


I70    TRANSPORTATION    COSTS  OF  COMMERCE 

shipments  over  long  distances,  correspondingly  high  per 
ton  mile.  If  they  are,  the  prices  of  the  goods  will  be 
raised  so  much  that  consumers  in  distant  markets  will 
supply  themselves  with  the  desired  goods  or  with  sub- 
stitutes from  nearer  home,  and  the  railroad  transpor- 
tation plant  may  not  be  as  fully  utilized  as  it  profitably 
might.  Ten  dollars  a  ton  for  transportation  to  a  given 
market,  added  to  the  price  of  shoes,  makes  Uttle  differ- 
ence to  the  average  purchaser  of  one  pair,  since  the  price 
of  one  pair  (supposing  it  to  weigh  two  pounds)  would 
have  to  be  greater  by  just  one  cent.  Nor  would  so 
slight  a  proportionate  addition  to  the  cost  of  getting  the 
shoes  from  a  distant  factory  be  Hkely  to  make  local 
production  preferable  where  other  industries  would 
otherwise  be  more  profitable.  But  ten  dollars  per  ton 
added  to  the  price  of  coal  would  very  greatly  diminish 
the  transportation  of  coal,  since  every  other  practicable 
method  of  getting  heat  or  power  would  be  hkely  to  be 
resorted  to  in  preference  to  purchasing  coal  from  a  dis- 
tance at  a  price  of  from  $12  to  $15  a  ton.  In  the  case  of 
low-grade  goods,  the  traffic  will  often  bear  but  a  low 
rate  without  being  destroyed.  In  the  case  of  high- 
grade  goods,  the  traffic  will  bear,  as  a  rule,  higher  rates.^ 
An  addition  to  rates,  per  ton  or  per  carload,  does  not, 
within  wide  Hmits,  so  much  affect  the  total  transporta- 

1  The  view  that  competition  between  two  or  more  railroads,  by  putting  em- 
phasis on  what  the  traffic  will  bear  without  being  diverted,  or,  as  the  writer  then 
phrased  it,  on  relative  responsiveness  of  traffic,  would  tend  to  keep  rates  on  valu- 
able goods  about  as  low  in  relation  to  cost  of  carriage  as  on  cheaper  goods,  was 
set  forth  in  the  Yale  Review,  May,  1907,  in  an  article  on  The  Basis  of  Rate 
Making  as  Affected  by  Competition  versiis  Combination  of  Railroads,  pp.  83-85, 
Cf.  Pigou,  Railway  Rates  and  Joint  Costs,  Quarterly  Journal  of  Economics, 
August,  1913,  p.  691.  But,  as  is  shown  in  the  text,  where  the  competition  is 
with  local  self-sufficiency  the  lower  grade  goods  are  likely  to  be  accorded  lower 
rates. 


RATES  ON  DIFFERENT   GOODS  171 

tion  business.  It  is  desirable  that  the  transportation 
plant  should  be  fully  utilized,  so  far  as  it  can  be  without 
loss,  and  it  is  therefore  desirable  that  rates  on  low-grade 
goods  should  be  low  enough,  provided  not  unprofitable, 
to  get  the  business.  Considerations  of  profit  are  likely 
to  cause  railroad  companies  to  put  these  low-grade 
goods  into  the  lower  classes  of  freight,  on  which  the  rates 
are  most  reasonable,  or  even,  in  many  cases,  to  carry 
them  at  special  "commodity  rates"  instead  of  at  regular 
"class  rates." 

It  may  be  added  that  the  practice  of  charging  more  for 
carrying  valuable  than  for  carrying  cheap  goods  is  not 
confined  to  railroads  but  is  observable  also  in  water 
transportation  on  regular-line  vessels,'  since  these  vessels 
carry  cargoes  made  up  of  many  different  kinds  of 
goods. 

But  the  question  may  arise,  how  the  relation  of  rates 
charged  for  the  transportation  of  different  kinds  of 
goods  should  be  fixed,  if  the  profits  of  a  transportation 
company  are  excessive  and  the  pubUc  is  entitled  to  a 
lower  average  of  rates.  Should  there  be  a  blanket  re- 
duction applying  to  all  goods  equally,  or  should  some 
rates  be  reduced  more  than  others,  or  should  some  rates 
be  reduced  and  others  not  ? 

Let  us  suppose  that  the  profits  on  the  capital  invest- 
ment of  a  certain  railroad  are  20  per  cent,  a  year  and 
that  it  is  thought  just  to  reduce  rates  and,  therefore, 
profits,  by  public  authority.  We  may  assume  that  the 
only  goods  carried  by  this  railroad  are  wheat  and  coal, 
that  the  rates  charged  on  each  are  the  rates  yielding 
the  largest  net  returns,  and  that  the  traffic  offered  at 
those  rates  does  not  fully  utilize   the  railroad  plant. 

•J.  R.  Smith,  The  Organization  of  Ocean  Commerce,  p.  46. 


172    TRANSPORTATION  COSTS  OF  COMMERCE 

The  question  then  is  :  on  what  goods  and  to  what  extent 
shall  reduction  be  required?     It  may  be  that  a  reduc- 
tion in  the  rate  charged  for  carrying  wheat,  of  lo  per 
cent.,  would  increase  the  traffic  in  wheat  by  but  i  or  2 
per  cent.,   whereas,  a  reduction  in  the  rate  charged  for 
carrying  coal,  of  10  per  cent.,  would  increase  the  coal 
traffic  by  8  per  cent.     Obviously  a  10  per  cent,  reduction 
can  then  be  required  on  coal  without  so  greatly  decreas- 
ing the  raihoad's  net  profits  as  if  the  reduction  were 
required  on  wheat.     Or  a  greater  reduction  can  be  re- 
quired on  coal  than  on  wheat,  without  occasioning  cor- 
respondingly greater  loss  to  the  railroad.     The  public 
may  derive  a  larger  gain  and  the  railroad,  at  the  same 
time,  suffer  no  larger,  and  perhaps  a  smaller,  loss  of  net 
revenue.     A  part  of  the  gain  of  shippers  and  consumers 
is  at  the  expense  of  the  railroad,  but  a  part  of  it  flows 
from  the  fuller  utiHzation  of  railroad  plant  and  so  repre- 
sents a  net  economic  gain  to  the  community.     Such  an 
adjustment  of  rates  might,  therefore,  be  not  undesirable. 
But  the  coal  should  under  no  circumstances  be  carried 
at  a  loss,  for  that  would  encourage  transportation  not 
worth  its  cost.     Nor  should  rates  on  wheat  be  higher 
than  would  pay  a  fair  return  on  the  railroad  plant  and 
equipment  necessary  to  transport  the  wheat  only,  for 
that    would    involve    an    arbitrary    taxation    of    wheat 
shippers  and  consumers  in  favor  of  shippers  and  con- 
sumers of  coal.     It  may,  perhaps,  be  justifiable  that  the 
advantages  of   the  larger   scale   transportation   should 
show  themselves  entirely  in  the  reduced  coal  rates.     But 
it  would  not  be  justifiable  to  make   the  wheat  rates 
higher,  because  coal  traffic  is  also  available,   than  if 
wheat  alone  could  be  carried. 

On  the  other  hand,  if  the  railroad  plant  in  question  is 


RATES  ON  DIFFERENT  GOODS  173 

already  pretty  fully  utilized  when  it  is  proposed  to  re- 
duce rates,  and  cannot  accommodate  much  more  traffic, 
the  reduction  may,  perhaps,  no  less  advantageously  be 
made  on  the  wheat.  At  any  rate,  increased  coal  traffic 
should  not  be  developed  at  rates  lower  than  would  pay 
reasonable  returns  on  any  additional  plant  thus  made 
necessary. 

It  is  obvious  that  similar  considerations  may  deserve 
attention  when  the  railroads  propose  rate  advances  and 
seek  the  consent  of  the  Interstate  Commerce  Commis- 
sion to  put  such  proposed  advances  into  effect.^ 

Whether  voluntary  or  forced,  a  special  rate  reduction 
on  favored  goods  is  only  justifiable  if  total  traffic  is  thus 
increased.  A  reduction  in  the  charge  for  carrying  stone 
from  a  quarry  to  market  might  be  economically  defen- 
sible if  it  meant  less  community  self-sufficiency,  more 
persons  engaged  in  producing  for  a  distant  market,  con- 
sequent greater  total  trade,  and  more  transportation. 
But  economic  justification  would  be  lacking  if  the  re- 
sult of  the  reduction  was  that  the  quarry  company, 
instead  of  adding  to  the  total  transportation  business  of 
the  reducing  railroad,  merely  drew  into  its  quarries  the 
sons  and  hired  men  of  neighboring  farmers,  who  would 
otherwise  be  devoting  their  entire  labor  time  to  provid- 
ing the  railroad  with  traffic  in  wheat.  In  such  a  case, 
discriminating  reduction  would  tend  to  divert  the  in- 
dustrial effort  of  the  locality  concerned,  from  more  to 
less  desirable  channels.  The  reduction,  if  desirable, 
should  then  be  general  and  not  discriminating. 

'  See  Bauer,  Returns  on  Public  Service  Properties,  Political  Science  Quarterly, 
March,  1915,  pp.  106-133,  especially  pp.  116,  117. 


174  TRANSPORTATION  COSTS  OF  COMMERCE 

§4 
Summary 

We  conclude,  then,  that  discrimination  between  dif- 
ferent kinds  of  goods  should  not  be  arbitrary,  but  may, 
under  certain  circumstances,  be  economically  defensible. 
When  goods  are  competitive,  higher  rates  should  not  be 
charged  for  carrying  one  kind  the  same  distance  and  to 
the  same  market  as  another  kind,  unless  the  actual 
transportation  cost  is  greater,  since  such  discrimination 
in  rates  tends  to  divert  industry  from  a  more  into  a^less 
profitable  channel.  Neither  should  arbitrary  discrimina- 
tion between  raw  materials  and  finished  products  be 
allowed  to  force  manufacturing  industries  into  locations 
where  there  is  relative  uneconomy  of  labor.  But  lower 
rates  on  some  goods  than  on  others  may  be  justified  in 
certain  cases  where  the  above  evils  are  not  likely  to 
result,  and  where  more  complete  utilization  of  the  trans- 
portation plant  is  thus  secured.  And  in  reducing  rates 
when  profits  are  unduly  high,  regulating  bodies  may, 
with  propriety,  give  attention  to  the  probable  effects 
on  traffic  of  reductions  in  the  charges  for  carrying 
different  kinds  of  goods. 


CHAPTER  VII 

Discrimination  among  Shippers 


Methods  of  Practicing  and  of  Concealing  Discrimination 
among  Shippers 

E[aving  discussed  discrimination  among  different 
places  and  among  different  kinds  of  goods,  we  have 
next  to  consider  discrimination  among  different  shippers, 
among  different  persons,  or  corporations.  This  kind  of 
discrimination  has  been,  with  the  railroads  of  the  United 
States,  very  common,  and  as  a  matter  of  fact,  is  still  in 
some  degree  practiced.  Yet  it  is  pretty  generally  ob- 
jected to  as  unfair,  is  perhaps,  of  all  kinds  of  discrimina- 
tion, most  repugnant  to  the  ideals  of  a  democratic  people, 
and  is,  for  American  railroads,^  definitely  illegal  and 
punishable.  Discrimination  among  shippers  is  prac- 
ticed also  to  some  extent  in  ocean  transportation  by 
regular-Hne  vessels. ^    The  conditions  tending  to  produce 

1  Or  a  railroad  and  a  water  line  when  they  are  operated  "under  a  common 
control,  management,  or  arrangement  for  a  continuous  carriage  or  shipment." 

*Huebner,  Report  on  Steamship  Agreements  and  Affiliations  in  the  Ameriean 
Foreign  and  Domestic  Trade,  in  Proceedings  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  in  the  Investigation  of  Shipping  Combinations,  1914,  Vol. 
rV,  pp.  236,  237. 

As  the  time  for  sailuig  draws  near,  a  line  vessel  will  sometimes  accept  very  low 
rates  rather  than  start  with  a  very  small  cargo,  while  it  will  charge  fairly  high 
rates  if  its  space  is  nearly  taken.  It  may  charge  different  rates  to  the  very  same 
person  on  different  consignments  of  goods.  (See  Interstate  Commerce  Reports, 
Vol.  XI,  p.  24.)  This,  in  itself,  is  not  objectionable.  Persistent  and  intentional 
favoritism  is  so.     (See  §  4  of  this  Chapter,  VII  of  Part  III.) 

175 


176    TRANSPORTATION   COSTS  OF  COMMERCE 

discrimination  among  shippers  are  hardly  to  be  found 
in  the  case  of  charter  trafl&c.  Competition  of  tramp 
vessels  insures  reasonable  rates  to  all  shippers  or  groups 
of  shippers  able  to  charter  a  vessel;  and  one  shipper 
would  not  often  be  favored,  intentionally,  with  low 
charter  rates,  so  long  as  others  were  ready,  singly  or 
jointly,  to  charter  the  same  vessel  and  pay  higher  rates. 
Perhaps  for  this  reason  there  has  been  more  of  a  tend- 
ency to  let  competition  on  waterways  take  its  course 
unregulated,  though  the  evidences  seem  to  be  increasing 
that  regular-line  companies  are  comparable,  in  many 
respects,  to  railroad  companies,  are  similarly  subject  to 
monopoly  control,  though  perhaps  not  to  the  same  de- 
gree, and  may  need  to  have  their  practices  investigated 
with  a  view  to  regulation. 

The  popular  opposition  to  discrimination  among 
shippers,  and  the  fact  that  legislation  has  forbidden 
railroads  ^  to  practice  it,  combined  with  a  frequent  wish 
that  rival  transportation  companies  should  not  know 
what  is  being  done,  have  caused  discriminating  rates  to 
be  given  and  received  in  underhanded  and  evasive  ways. 
In  such  ways  the  Standard  Oil  Company  seems  to  have 
received  transportation  rate  favors  in  recent  years. 
Thus,  it  was  shown  by  a  government  report  ^  in  1906, 
that  this  company  was  advantaged  by  lower  rates  made 
from  points  where  it  alone  had  refineries  than  from  points 
where  there  were  refineries  of  independent  firms. 

Various  devices  have  been  used  to  insure  secrecy, 
such  as  blind  billing,  false  bilHng,  failure  to  post  and  file 

'  Or  railroads  and  water  lines  when  the  two  modes  of  transport  are  operated 
"under  a  common  control,  management  or  arrangement,  for  a  continuous  carriage 
or  shipment." 

'  Report  of  the  Commissioner  of  Corporations  on  the  Transportation  of 
Petroleum,  1906. 


DISCRIMINATION  AMONG  SHIPPERS       177 

rates,  naming  rates  for  goods  transported  in  one  kind  of 
car  while  carrying  the  same  goods  more  cheaply  in  an- 
other kind  of  car,  etc.  The  lowest  pubHshed  rate  on 
oil  from  Pennsylvania  refining  points  into  Vermont  in 
1904,  was  23I  cents  per  hundred  pounds.  The  Standard 
Oil  Company,  however,  reached  these  points  from  its 
refinery  at  Olean,  N.  Y.,  by  way  of  Norwood,  N.  Y.,  for 
from  15.3  to  16.9  cents  per  hundred.^  The  combination 
of  rates  under  which  this  company's  oil  was  shipped 
consisted  of,  first,  a  secret  rate  from  Olean  to  Rochester, 
over  a  part  of  the  Pennsylvania  lines,  a  rate  neither  filed 
nor  posted,  and  used  in  connection  with  blind  billing ;  ^ 
second,  a  rate  of  9  cents  per  hundred  pounds  over  the 
New  York  Central  road  from  Rochester  to  Norwood; 
third,  low  rates  over  the  Rutland  and  Central  Vermont 
railroads.  Copies  of  the  blind  waybills  of  the  Pennsyl- 
vania Railroad  gave  evidence  that  a  large  number  of  cars 
ostensibly  billed  to  Rochester  were  really  destined  to 
places  in  Vermont.  There  was  apparently  a  pretense 
that  the  traffic  was  intrastate,  in  order  that  there  might 
be  an  excuse  for  the  failure  to  file  and  post  the  rates  in 
accordance  with  the  Federal  law  on  interstate  transpor- 
tation. The  open  tariff  rate  of  the  Rutland  Railroad 
Company,  on  oil  in  barrels,  from  Norwood,  N.  Y.  to 
Burlington,  Rutland,  Bellows  Falls,  and  other  Vermont 
points,  was  t,t,  cents  per  hundred  pounds.  But  it  ap- 
peared that  the  Rutland  had,  to  these  three  points,  from 
Norwood,  in  connection  with  the  Central  Vermont  Rail- 
road, very  low  tank  car  rates  of  $23,  $28,  and  $30,  re- 
spectively, per  tank  car ;  and  it  appeared,  also,  that  for 

'  Ibid.,  pp.  92-112. 

2  That  is,  the  waybills  omitted,  in  each  case,  a  statement  of  the  rate  and  of  the 
total  amount  of  the  freight  charge. 
PART  m  —  N 


178    TRANSPORTATION  COSTS  OF  COMMERCE 

some  time  there  had  been  no  limit  on  the  size  of  tank 
cars  so  used.  Investigation  showed  that  the  tank  cars 
sent  to  the  above-mentioned  three  places  from  the  Penn- 
sylvania system  were  large,  having  an  average  capacity 
of  60,000  pounds.  The  average  rate  per  hundred  pounds 
in  these  tank  cars  was,  therefore,  between  less  than  4  and 
5  cents,  instead  of  33  cents  as  in  barrel  shipments.  In- 
dependent shippers  had  repeatedly  asked  for  rates  into 
Vermont,  but  had  never  received  information  of  these 
low  tank  car  rates. 

The  Standard  Oil  Company,  it  was  shown  in  the  same 
government  report,  got  entrance  to  southern  territory, 
from  its  great  refinery  at  Whiting,  Ind.,  largely  via 
Grand  Junction,  Tenn.  There  was  a  rate  filed  reading 
only  to  Grand  Junction.^  There  was  no  tariff  of  the 
Southern  Railway,  reading  from  Grand  Junction  to 
other  destinations,  filed  with  the  Interstate  Commerce 
Commission.  The  officers  of  the  Southern  Railway 
Company  claimed  that  they  believed  they  were  merely 
collecting  their  proportion  of  a  through  rate  pubhshed 
by  the  other  roads.  Whatever  the  facts  as  to  this  con- 
tention, the  low  rate  was  not  practically  available  to 
other  shippers  than  the  Standard  Oil  Company. 

But  the  rate  based  on  Grand  Junction  was  effectively 
secret  for  another  reason. ^  Though  the  13-cent  rate  as 
far  as  Grand  Junction  was  filed  with  the  Interstate 
Commerce  Commission,  yet  this  rate  was  not  made  to 
read  from  Whiting,  Ind.,  where  the  Standard's  refinery 
was  located,  nor  from  Chicago,  111.,  just  across  the  state 
border,  but  from  insignificant  near-by  towns.      Thus, 

>  Report  of  the  Commissioner  of  Corporations  on  the    Transportation    of 
Petroleum,  1906,  p.  250. 
'  Ibid.,  pp.  268,  269. 


DISCRIMINATION  AMONG  SHIPPERS       179 

the  tariff  of  the  lUinois  Central  Railroad,  naming  the 
13-cent  rate,  read  from  Riverdale,  111.,  and  the  later  tariff 
of  the  Chicago  and  Eastern  Illinois,  from  Dolton,  111., 
both  of  these  places  being  obscure  junction  points  in  the 
Chicago  switching  district.  An  independent  shipper 
would  naturally  inquire  the  rate  from  Chicago  to  southern 
cities,  not  the  rate  from  Riverdale  or  from  Dolton,  and 
in  fact,  the  Chicago  and  Eastern  lUinois  Railroad  itself, 
when  the  Bureau  of  Corporations  (carrying  on  the  inves- 
tigation preparatory  to  its  report)  asked  for  the  rates 
from  Whiting  to  numerous  points  in  the  South,  made 
no  reference  to  the  Grand  Junction  combination,  but  re- 
ported, in  writing,  rates  based  on  Evansville.  Both  the 
Chicago  and  Eastern  Illinois  Railroad  and  the  Illinois 
Central  Railroad  practiced  bhnd  billing. 

Another  method  of  discriminating  without  seeming  to 
do  so  is  by  the  use  of  a  so-called  industrial  railroad.  A 
manufacturing  concern  has  constructed  about  its  plant 
a  few  thousand  feet  of  trackage.  The  ownership  and 
control  of  such  trackage  is  vested  in  a  "Railroad  Com- 
pany," which  in  turn  is  owned  by  the  manufacturing 
concern.  Then  the  diminutive  railroad  system  or  com- 
pany is  allowed,  by  other  railroads,  a  share  of  the 
through  rate  to  destinations,  in  excess  of  the  real  value 
of  its  services.  In  the  ultimate  analysis,  the  manufac- 
turing corporation  receives  the  real  benefit,  and,  in 
effect,  pays  lower  rates  for  transportation  than  do  its 
rivals. 

A  case  decided  by  the  Interstate  Commerce  Commis- 
sion in  1904  suppUes  an  illustration  ^  of  discrimination 
so  brought  about.  It  was  shown,  in  this  case,  that  the 
International  Harvester   Company  owned   the   capital 

1  Interstate  Commerce  Reports,  Vol.  X,  pp.  385-404. 


i8o    TRANSPORTATION  COSTS  OF  COMMERCE 

stock  of  the  Illinois  Northern  Railroad,  and  a  controlling 
interest  in  the  Chicago,  West  Pullman  and  Southern 
Railroad  Company.  These  two  railroad  companies 
were  terminal  connecting  roads  operating  in  and  about 
the  city  of  Chicago  between  the  plant  of  the  Harvester 
Company  and  various  railroads  and  other  industries. 
Until  about  the  time  of  the  complaint  before  the  Com- 
mission, these  terminal  roads  had  received,  for  their 
services,  switching  charges  of  from  $i  to  $3.50  per  car. 
But  this  allowance  had  been  increased,  until  it  came  to 
be  a  division  of  the  through  rate  to  destination,  amount- 
ing sometimes  to  20  per  cent,  of  the  rate,  or  $12  per  car 
of  20,000  pounds,  instead  of  the  former  maximum  of 
$3.50.  These  high  charges  were  regarded  by  the  Com- 
mission as  unlawful  discrimination  in  favor  of  the  In- 
ternational Harvester  Company,  and  were,  therefore, 
forbidden. 

§  2 

Competition   of  Transportation   Lines   as   Causing   this 

Discrimination 

What  is  to  be  said  as  to  the  causes  of  discrimination 
among  shippers?  Competition  of  transportation  com- 
panies, e.g.  railroads,  with  each  other,  the  fear  of  each 
that  it  will  lose  large  traffic  to  its  rivals,  is  generally  put 
forth  as  the  principal  explanation.  It  is  a  case  of  charg- 
ing what  the  traffic  will  bear.  And  it  is  a  case  of  charg- 
ing what  the  traffic  will  bear  without  being  diverted; 
not  what  it  will  bear  without  being  destroyed.  This 
seems  to  mean  special  concessions  where  there  is  special 
fear  of  large  diversion  of  traffic  to  rivals.  One  might 
suppose  that  competition  would  mean  lower  rates  to  all 
shippers  rather  than  to  a  favored  few  only  or  to  one. 


DISCRIMINATION  AMONG   SHIPPERS       i8i 

Two  reasons  may  be  suggested  to  account  for  the  fact 
that  reductions  are  made  to  some  shippers  and  not  to 
others.  In  the  first  place,  the  transportation  company 
making  the  special  rate  is  anxious  that  rivals  shall  not 
know  of  it  lest  these  rival  transportation  lines  get  the 
traffic  by  offering  as  low  or  lower  rates.  But  if  the 
reduction  is  general,  it  is  soon  known  to  rival  Unes.  In 
the  second  place,  reductions  are  made  to  the  very  large 
shippers  through  fear  of  losing  their  traffic.  There  is 
much  less  fear  of  losing  the  business  of  small  shippers, 
because  this  business  is  looked  upon  as  relatively  un- 
important. And  it  is  to  be  noted  that  what  the  large 
shipper  wants  and  is  likely  to  insist  upon,  if  he  feels  his 
power  sufficient,  is  not  merely  low  rates,  but  a  difference 
in  rates  between  him  and  his  competitors.  If  a  large 
shipper,  controlling  i  of  the  business  in  any  kind  of 
goods,  while  the  remaining  i  is  produced  by  scattered 
independents,  threatens  a  railroad  company  with  entire 
loss  of  patronage  unless  the  railroad  company  will  dis- 
criminate secretly  in  his  favor,  the  railroad  is  likely  to  be 
frightened  into  submission.  It  may  not  have  to  submit 
to  live,  but  its  officers  think  submission  will  bring  greater 
profits  than  refusal.  Hence  they  agree  to  special  rates 
which  the  scattered  independents  may  not  enjoy.  At 
one  time  (1885)  the  Standard  Oil  Company  paid  10 
cents  a  barrel  to  have  its  oil  carried  a  given  distance  on 
the  Cincinnati  and  Marietta  Railroad,  while  its  competi- 
tors were  required  to  pay  35  cents.  As  if  this  were  not 
discrimination  enough,  the  excess  25  cents  charged  to 
its  rivals  was  to  be  turned  over  to  the  Standard  Oil 
Company.^ 

'  Tarbell,  The  History  of  the  Standard  Oil  Company,  New  York  (McClure 
Phillips  and  Co.),  1904,  pp.  77-86. 


i82    TRANSPORTATION  COSTS  OF  COMMERCE 

In  order  to  prevent  competition  from  taking  this  form, 
the  law  has  to  provide  and  enforce  severe  penalties,  just 
as  it  has  to  enforce  penalties  against  "competition" 
which  takes  the  form  of  killing  a  competitor,  or  destroy- 
ing his  property,  or  misrepresenting  his  goods,  or  using 
child  labor.  Under  section  two  of  the  Interstate  Com- 
merce Act,  discrimination  between  shippers  is  illegal 
by  whatever  special  rate,  rebate,  drawback,  or  other 
device  it  may  be  brought  about.  The  Interstate 
Commerce  Commission  has  authority  over  rate  prac- 
tices and  can  investigate  cases  where  discrimination  is 
suspected.  Furthermore,  the  Elkins  law  of  1903,  as 
amended  in  1906,  makes  both  the  giving  and  the  re- 
ceiving of  a  concession  from  the  published  rate  a 
criminal  offense. 

It  is  not  intended  to  assert  that  lower  rates  per  hun- 
dred pounds  should  not  be  charged  on  large  shipments 
than  on  smaller  ones,  to  the  extent  that  the  larger  ship- 
ments are  carried  at  proportionately  less  cost  by  virtue 
of  their  concentration.  That  the  rate  should  be  lower 
on  carload  than  on  less  than  carload  lots,  is  generally 
recognized.  There  may  be  equal  justification  for  a 
somewhat  lower  rate,  per  hundred  pounds,  on  trainload 
than  on  carload  lots,  provided  that  the  difference  is 
not  excessive  and  that  the  lower  large-scale  rates  are 
open  to  all  shippers  alike  on  equal  terms.  But  it  is 
hard  to  believe  that  any  saving  in  the  handling  of  large 
lots  is  sufficient  to  justify  such  discrimination  as  that 
above  mentioned,  where  one  company  paid  10  cents  for 
a  service  that  others  could  get  for  not  less  than  35 
cents,  and  had  its  lo-cent  rate  reduced  by  getting  the 
surplus  25  cents  on  all  others'  shipments. 


DISCRIMINATION   AMONG  SHIPPERS       183 


Other  Causes  of  Discrimination  among  Shippers 

Other  influences  than  competition  of  transportation 
lines  may  cause  discrimination  among  shippers.  With 
or  without  competition,  there  would  be  Hkely  to  result 
discrimination  in  favor  of  industrial  concerns  in  which 
some  of  the  principal  stockholders  or  some  of  the  direc- 
tors or  important  officials  of  transportation  companies 
have  financial  interests.  That  the  principal  stock- 
holders and  directors  in  some  big  industrial  concerns 
which  have  received  such  favors  are  also  largely  in- 
terested in  railroads,  is  generally  recognized.  But  there 
appears  to  be  no  instance  of  discrimination  among  ship- 
pers where  the  discrimination  has  been  definitely  traced 
to  this  cause, 

A  special  report  ^  of  the  Interstate  Commerce  Com- 
mission in  1907,  however,  presented  evidence  showing 
that  the  Pennsylvania  Railroad  system  had  discriminated 
in  its  allotment  of  cars  in  favor  of  coal  companies  in 
which  some  of  its  officials  were  interested.  These  offi- 
cials had  in  some  cases  bought  their  stock  in  coal  com- 
panies, had  in  other  cases  obtained  it  mainly  by  promot- 
ing or  allowing  their  names  to  be  used  in  promoting  said 
companies,  and  had  in  still  other  instances  been  given 
the  stock  outright  by  promoters.-  It  appeared  that 
during  a  period  of  six  weeks  in  the  early  part  of  1903, 
when  coal  was  in  great  demand,  a  large  number  of  mines 
on  the  Pennsylvania  system  were  left  without  any  car 
supply  whatever.     So  far  as  could  be  learned,  however, 

1  Discrimination  and  Monopolies  in  Coal  and  Oil,   Special  Report   by   the 
Interstate  Commerce  Cominission,  1907. 
*  Ibid.,  p.  23. 


i84    TRANSPORTATION  COSTS  OF  COMMERCE 

no  mine  on  the  Pennsylvania  system,  in  which  an  officer 
of  that  company  was  interested  as  a  security  holder, 
was  left,  during  the  period  in  question,  without  car 
service.^ 

Discrimination  in  fact,  if  not  in  form,  is  hkely  to  result 
when  a  transportation  line,  as  a  corporation,  owns  a 
producing  company  or  the  securities  of  a  producing 
company.  Under  such  circumstances  may  come  the 
temptation  to  the  transportation  Hne  to  make  rates 
which  will  drive  out  independent  producing  concerns. 
It  is  to  be  noted  that  discrimination  so  caused  can  be  at 
its  worst  when  there  is  monopoly  of  transportation. 
When  competition  exists,  the  independent  producing 
firm,  if  denied  reasonable  rates  by  one  hne,  has  at  least 
a  recourse  to  that  line's  competitors  and  may  ship  by 
the  line  offering  the  lowest  rates.  When  there  is  trans- 
portation monopoly,  high  rates  to  independent  produc- 
ing firms  may  drive  these  firms  out  of  business,  estab- 
lishing in  complete  control  the  subsidiary  corporations 
through  which  the  transportation  line  (or  lines)  carries 
on  industrial  ventures.  It  is  not  even  essential  that  the 
rates  should  be  nominally  higher  for  the  independent 
firms  than  for  those  producing  corporations  which  the 
transportation  company  owns.  It  matters  not  how  high 
rates  are  made  for  a  subsidiary  company  owned  by  a 
transportation  line.  Whatever  such  a  dependent  com- 
pany loses  in  having  to  pay  higher  freight  rates,  the 
transportation  hne  which  owns  it  gains.  It  matters 
not  how  much  a  company  pays  for  any  service,  when  it 
only  pays  itself.  But  it  does  matter  to  independent 
companies  how  high  rates  they  must  pay.     High  rates 

1  Discrimination  and  Monopolies  in  Coal  and  Oil,  Special  Report  by  the 
Interstate  Commerce  Commission,  1907,  p.  63. 


DISCRIMINATION  AMONG  SHIPPERS       185 

to  them  mean  loss  of  profits  and  mean  ultimate  bank- 
ruptcy. Discrimination  caused  in  this  way  is  asserted, 
in  government  reports/  to  have  been  practiced  by  the 
railroads  serving  the  anthracite  coal  mines  in  and  near 
Pennsylvania.  The  effect  seems  to  have  been  to  force 
out  independent  mining  concerns  and  to  enable  the  rail- 
roads to  get  possession  of  many  anthracite  coal  mines.^ 

§4 

The  Practice  of  Discriminating  among  Shippers,  Tested 
by  the  Principles  of  Industrial  and  Commercial  Ethics 

It  has  already  been  suggested  that  somewhat  lower 
rates  for  large  shipments  than  for  small  ones  may  often 
be  defensible  if  open  to  all  aHke.  So  far  as  there  is  a  real 
saving  to  a  transportation  company,  in  taking  for  ship- 
ment a  large  quantity  of  any  goods  at  a  time,  it  is  proper 
that  rates  should  be  so  adjusted  as  to  encourage 
large  shipments.  But  arbitrary  discrimination  among 
shippers,  i.e.  favoritism,  by  transportation  lines  has 
nothing  whatever  to  commend  it.  It  tends  to  build  up 
private  monopolies.  It  injures  consumers.  It  violates 
the  principles  of  industrial  and  commercial  ethics. 

That  discrimination  among  shippers  tends  to  build 
up  monopolies  and  to  force  out  would-be  competitors 

1  2d  Session,  S2d  Congress,  H.  R.  2278,  pp.  iii,  iv,  and  vi;  also  Industrial 
Commission  Reports,  1902,  Vol.  XIX,  p.  462. 

2  Tlie  "Commodity  Clause"  of  the  Hepburn  Act  of  1906,  which  was  intended 
to  make  impossible  this  ownership  by  railroads,  of  producing  companies  or  of 
goods  transported  (with  the  exception  of  timber  and  its  manufactured  products), 
has  been  so  interpreted  by  the  Supreme  Court  as  to  make  it  of  doubtful  impor- 
tance. See  United  Stales  v.  Delaware  and  Hudson  Company,  213  U.  S.,  366; 
United  States  v.  Lehigh  Valley  Ry.,  220  U.  S.,  257;  United  Stales  v.  Erie  Ry., 
220  U.  S.,  275  ;  United  Shit'S  v.  Delaware,  Lackawanna  and  Western  Railroad  Co. 
and  the  Delaware,  Lackawanna  and  Western  Coal  Co.,  35  Supreme  Court  Reporter, 
873- 


i86    TRANSPORTATION  COSTS  OF   COMMERCE 

is  too  obvious  to  require  much  further  proof.  The  com- 
pany which  has  to  pay  a  higher  freight  rate  is  disad- 
vantaged to  that  extent  in  the  struggle  to  make  a  low 
price  to  the  consumer  while  yet  disposing  of  its  goods  at 
a  profit. 

The  railroads  (or  navigation  companies),  taken  as  a 
whole,  have  nothing  to  gain  by  favoritism.  They  do 
not  have  greater  traffic  in  any  commodity,  e.g.  they  do 
not  have  greater  traffic  in  oil,  merely  because  by  favorit- 
ism they  have  enlarged  one  shipper's  business,  while 
simultaneously  ruining  other  shippers.  Thus,  the  rail- 
road plants  are  not,  taken  as  a  whole,  more  fully  utilized 
by  such  discrimination.  Indeed,  to  the  extent  that  the 
railroads  build  up  a  monopoly  which,  by  making  high 
prices,  curtails  consumption,  they  may  lose  trafl&c. 
Effectively  to  prohibit  this  form  of  competition  among 
transportation  companies  would  leave  these  transpor- 
tation companies  no  worse  off  and  perhaps  better  off. 
The  condition  is  somewhat  parallel  to  that  which  con- 
fronts us  when  we  attempt  to  prohibit  child  labor  or 
to  limit  the  hours  of  adult  labor  in  mines,  etc.  Each 
company  concerned  may  be  not  unwilling  to  conform, 
provided  it  can  have  assurance  that  its  competitors  will 
do  likewise.  Such  cases  come  under  one  of  the  classes 
of  cases,  which,  John  Stuart  Mill  believed,  justified 
interference  of  government  in  economic  affairs,  viz., 
where  something  is  to  the  general  interest,  but  where 
nobody  concerned  is  likely  to  conform  to  this  interest 
voluntarily.^  The  force  of  law  may  then  properly  com- 
pel conformity  on  the  part  of  all. 

Discrimination  among  shippers  can  hardly  be  said  to 
benefit  consumers.     If  it  takes  the  form  of  abnormally 

»  Mill,  Principles  of  PoliUcd  Ii(;onomy,  Book  V,  Chapter  XI,  Section  12. 


DISCRIMINATION  AMONG  SHIPPERS       187 

high  rates  charged  the  competitors  of  the  favored  com- 
pany, consumers  are  simply  deprived  of  the  benefit  of 
competition  by  these  other  concerns,  without  getting  the 
goods  from  the  favored  firm  at  any  lower  prices.  The 
resulting  monopoly  will  almost  certainly  bring  higher 
prices.  Even  if  the  discrimination  takes  the  form  of 
abnormally  low  rates  to  the  favored  corporation,  con- 
sumers will  hardly  derive  permanent  benefit  from  it. 
The  favored  corporation  can  appropriate  the  difference 
between  its  freight  rate  and  that  of  its  rivals,  or  it  can 
drive  them  out  of  business  and  thereafter  appropriate 
more  than  the  difference.  A  low  rate,  which  is  in  the 
nature  of  a  special  privilege,  is  not  likely  to  inure  to  the 
benefit  of  the  general  pubUc. 

Personal  discrimination  not  only  does  not  benefit,  and 
tends  to  injure  railroads  and  consumers ;  it  also  fails  to 
stimulate  the  productive  power  of  the  community  and 
tends  rather  to  weaken  it.  It  removes,  to  a  degree,  the 
greatest  stimulus  of  efficiency,  viz.,  the  consciousness 
that  by  efficiency  and  by  it  alone,  can  success  be  attained. 
There  is  no  certainty  that  the  most  efficient  company 
will  be  the  one  most  favored  by  discrimination.  Favors 
are  more  likely  to  go  to  a  large  concern  than  to  a  pro- 
gressive and  growing  one.  And  even  if,  as  doubtless 
not  infrequently  happens,  the  favored  concern  is  also, 
at  the  time,  the  most  efficient,  a  knowledge  that  dis- 
criminating rates  will  partly  protect  it  from  competition 
certainly  is  not  conducive  to  keeping  it  thus  efficient. 
In  short,  survival  in  competition,  through  favoritism,  is 
likely  not  to  be  a  survival  of  the  socially  fittest. 

When  men  are  organized  in  a  community  or  nation, 
the  survival  of  this  community  or  nation  is  of  funda- 
mental   importance.     The    struggle    for    existence   has 


1 88    TRANSPORTATION  COSTS  OF  COMMERCE 

provided  sufficient  evidence  that  men  who  are  isolated 
are  at  a  disadvantage ;  organized  society  helps  the  in- 
dividuals in  it  to  life  and  happiness.  Therefore,  with 
men,  the  struggle  for  existence  has  long  since  taken  the 
form  of  a  struggle  or  competition  between  groups.^ 
The  group  which,  all  other  things  equal,  has  the  best 
organization  and  the  highest  types  of  men,^  is  most  likely 
to  prevail.  Those  characteristics,  those  standards  of 
right,  and  those  organizations  within  a  community 
which  are  most  calculated  to  further  the  welfare  of  the 
whole  and  its  continued  survival,  must  be  adjudged  the 
fittest.  For  this  reason,  the  competitive  system  of  in- 
dustry has  been,  by  most  writers,  regarded  as  desirable. 
It  stimulates  efficiency  among  the  members  of  a  group 
and,  therefore,  in  the  group  as  a  whole.  For  this  reason, 
the  aim  of  eugenics  is  sound.  Its  purpose  is  to  stop  the 
breeding  of  poor  units  of  society  and  bring  about  a  breed- 
ing, more  largely,  from  the  strong,  the  alert,  the  success- 
ful. For  this  reason,  monopoly  established  by  the 
favoritism  of  transportation  companies  is  undesirable. 
Consumers  are  Hkely  to  suffer  in  the  end.  Efficiency 
is  likely  to  be  less.  The  community  as  a  whole  is  injured 
and  therefore  weakened.  There  is  a  great  difference  in 
the  effect  on  the  general  welfare  between  monopoly 
which  is  gained  and  kept  by  efficiency  alone,  and  mo- 
nopoly which  is  the  result  of  artificial  advantages,  mak- 
ing competition  by  others  difficult  or  impossible. 


'  Cf .  on  this  topic  in  its  connection  with  economic  activities,  Hadley,  Econom- 
ics, New  York  (Putnam),  igo6,  pp.  18-23. 

*  At  least,  as  regards  their  relations  to  fellow  members  of  their  own  group. 
Whether  considerate  dealing  with  members  of  alien  groups  is  any  advantage  may 
depend  largely  on  the  stage  of  development  of,  and  the  strength  of,  world  opinion. 
Such  dealing  may  conceivably  make,  for  a  national  group,  all  the  difference  be- 
tween living  in  a  world  of  friends  or  a  world  of  imited  enemies. 


DISCRIMINATION  AMONG  SHIPPERS       189 

There  is  a  considerable  analogy  between  transporta- 
tion discrimination  and  the  protective  tariff  system.  In 
both  cases,  some  producers  (by  the  protective  tariff, 
foreign  producers)  are  put  at  an  arbitrary  disadvantage 
compared  with  others.  In  both  cases  the  rule  that  suc- 
cess should  depend  on  efficiency  in  service  is  violated. 
In  both  cases,  competition  is  seriously  restricted  and 
monopoly  may  result.^  In  one  case,  efforts  of  persons 
desiring  the  favoritism  are  turned  from  the  search  for 
more  efficient  methods  of  production  into  selfish  po- 
litical activity  ;  in  the  other  case,  efforts  which  might  be 
devoted  to  rivalry  in  efficiency  are  turned  to  the  persua- 
sion or  browbeating  of  transportation  lines'  managers. 
In  both  cases,  the  pubHc  is  likely  to  suffer. 

The  ideal  of  industrial  and  commercial  organization 
requires  that  there  should  be  ever  active  in  business  a 
rivalry  of  business  men  and  corporations  in  serving  well 
the  community,  and  that  success  should  come  to  those 
whose  service  is  the  best.  An  individuaUstic,  as  distin- 
guished from  a  sociaHstic  or  a  communistic  society,  relies 
frankly,  to  a  great  degree,  on  the  self-interest  of  men 
and  their  interest  in  their  own  mimediate  families,  as 
motives  to  economic  activity.  To  the  extent  that  an 
individualistic  society  realizes  its  own  proper  ideal,  it 
endeavors  by  public  opinion  and  by  definite  and  enforced 
law  to  prevent,  absolutely,  all  anti-social  means  of  gain, 
to  prevent  all  methods  of  carrying  on  business,  which 
are  antagonistic  to  the  ultimate  well-being  of  the  social 
group.  So  far  as  it  is  possible  to  do  this,  the  only  profit- 
able lines  of  activity  left  open  are  those  in  which  the 
individual  gains  the  most  for  himself  by  doing  the  most 
for  the  community.     He  who  invents  labor-sav-ing  ma- 

»  Cf.  Part  II,  Chapter  VI,  §  10. 


I90    TRANSPORTATION  COSTS  OF  COMMERCE 

chinery,  he  who  best  organizes  the  forces  of  production, 
he  who  best  economizes  raw  materials,  he  who  accumu- 
lates needed  capital,  he  who  is  therefore  able  to  offer 
the  pubHc  the  most  for  a  given  money  return,  finds  him- 
self most  prosperous.  The  attainment  of  such  an  ideal 
of  industrial  and  commercial  life,  as  is  here  suggested, 
would  not  preclude  the  possibiHty  of  an  individual's 
acquiring  great  wealth.  Under  the  reign  of  this  ideal, 
great  wealth  would  become,  except  where  acquired  by 
gift  or  inheritance,  an  evidence  of  great  service,  and, 
therefore,  a  vaUd  title  to  distinction.  It  would  not  be, 
as  is  now  too  often  the  case,  a  badge  of  dishonor.  It  is 
conformity  to  this  ideal  of  industrial  and  commercial 
life,  by  the  individual  and  the  group,  which  constitutes 
industrial  and  commercial  morality. 

To  hasten  the  more  complete  realization  of  such  an 
industrial  ideal,  we  must  express  ourselves  in  its  favor 
and  denounce  its  opposite.  When  we  do  this,  however, 
we  are  liable  to  be  told  that  those  who  have  succeeded 
in  accumulating  wealth  by  anti-social  means,  for  example, 
by  illegal  and  discriminatory  railroad  rates,  are  no 
worse  than  many  others  who  have  remained  poor ;  that 
many  competitors  would  gladly  have  done  likewise  if 
they  could,  but  simply  lacked  the  chance  or  the  sharp- 
ness ;  that  it  is  not  right,  is  cruel,  in  short,  continually 
to  denounce  the  men  who  have  succeeded. 

Those  who  take,  without  qualification,  this  attitude, 
miss  the  whole  social  philosophy  of  disapproval  and 
punishment.  Every  wrongdoer,  be  he  murderer,  thief, 
or  industrial  free-booter,  is  the  product  of  two  forces, 
heredity  and  environment.  He  is  made,  absolutely,  by 
these.  Why,  therefore,  some  may  ask,  make  him  suffer 
for  wrongdoing,  by  disapproval  or   punishment.     The 


DISCRIMINATION  AMONG  SHIPPERS       191 

answer  is  threefold.  First,  restraint  is  necessary  on  the 
criminally  disposed,  in  order  to  protect  society  against 
their  anti-social  activities.  Second,  society's  disapproval 
and  punishment,  or  the  fear  of  these,  are  themselves 
part  of  the  environment  which  molds  men,  and  are, 
therefore,  in  some  degree,  preventive  of  wrong.  Third, 
denunciation  of  wrongdoing  arouses  the  unnoting  and 
the  indifferent,  and  so  helps  to  establish  and  enforce 
prohibitions.  If  we  would  have  a  true  industrial  and 
commercial  moraUty  generally  practiced,  we  must  mani- 
fest open  disapproval  of  industrial  free-booting.  Thus 
only  can  we  be  confident  of  developing,  in  the  rising 
generation,  a  sentiment  against  industrial  and  com- 
mercial immorality,  of  arousing  society  to  active  oppo- 
sition, and  of  making  unfair  methods  of  wealth-getting 
no  longer  pay.  We  must  have  such  laws  and  such 
enforcement  of  laws  that  it  will  only  be  worth  while  to 
accumulate  wealth  by  service. 

§  5 

Summary 

Discrimination  among  shippers  is,  we  have  seen, 
practiced  in  evasive  ways,  partly  because  of  its  illegality 
and  of  popular  disapproval.  These  ways  include  blind 
billing,  false  billing,  use  of  special  equipment,  such  as 
tank  cars  by  favored  shippers  at  secret  rates,  making 
discriminating  rates  read  from  insignificant  points  so 
that  others  than  the  favored  companies  shall  not  know 
of  them,  allowing  large  sums  for  the  services  of  terminal 
railroads  or  sidings  owned  by  corporations,  and  various 
other  concealments  and  evasions.  Discrimination  is 
caused  by  competition,  by  interest  of  stockholders,  di- 


192    TRANSPORTATION  COSTS  OF  COMMERCE 

rectors,  or  officers  of  a  transportation  company  in  other 
companies,  and  by  interest  of  a  transportation  com- 
pany itself  in  other  companies.  Discrimination  among 
shippers  does  not  benefit  transportation  companies 
themselves,  taken  as  a  whole,  nor  does  it  bring  economy 
by  more  fully  utilizing  the  transportation  plants.  It 
tends  to  injure  consumers.  It  builds  up  monopoly. 
It  conduces  to  the  survival  of  the  relatively  inefficient. 
It  violates  the  proper  ideal  of  industrial  and  commercial 
morality.  It  deserves,  in  full,  the  condemnation  it 
generally  receives,  and  should  be  persistently  hunted 
down  and  rooted  out  of  our  business  Ufe. 


CHAPTER  VIII 

Steps  in  the  Development  of  Rate  Regulation  en 

THE  United  States 

§1 

Extent  of  the  Rate-regulating  Power 

The  preceding  pages  have  set  forth  the  theory  of 
transportation  rates  in  relation  to  commerce,  have 
explained  what  important  departures  from  economically 
justifiable  rate-making  principles  are  likely  to  occur, 
and  have  therefore  gone  far  to  make  clear  the  philosophy 
of  public  rate  regulation.  The  real  reason  why  we 
have,  to  the  present  extent,  government  regulation  of 
transportation  rates,  is  that  the  protection  of  com- 
mercial and  industrial  interests  has  seemed  to  require 
it.  The  Supreme  Court  of  the  United  States,  in  the 
so-called  Granger  cases,  based  the  right  of  the  sev- 
eral states  to  regulate  railroad  rates  upon  the  public 
character  of  the  railroad  business.  The  pubhc  character 
of  the  railroad  business  is  evidenced  (in  the  view  of  the 
Supreme  Court)  by  three  facts.  The  first  of  these 
facts  is  that  the  railroads  are  common  carriers,  having, 
therefore,  duties  to  perform  in  which  the  public  has  an 
interest.^  The  second  is  that  a  railroad  is  a  public 
highway.     The  creation  and  maintenance  of  a  public 

•  See  Munn  v.  Illinois,  94  U.  S.,  130. 
o  193 


194    TRANSPORTATION  COSTS  OF  COMMERCE 

highway  is  a  recognized  function  of  the  state  and, 
therefore,  if  the  work  is  delegated  to  a  private  corpora- 
tion, such  a  corporation  is  performing  a  function  of  the 
state.^  The  third  is  that  the  building  of  a  railroad  in- 
volves the  grant  and  use  of  the  power  of  eminent  domain, 
a  power  which  is  supposed  to  be  exercised  only  for  a 
pubhc  purpose.^  This  last  fact,  viz.,  that  the  power  of 
eminent  domain  is  exercised  in  the  building  of  rail- 
roads, is  not,  like  the  two  facts  previously  mentioned, 
a  reason  why  the  railroad  business  is  public  in  character. 
It  is  rather  a  result  ^  of  the  public  character  of  the 
business.  It  is  important  chiefly  as  furnishing  indis- 
putable evidence  that  the  business  is  pubhc.  But  it 
by  no  means  follows  that  a  business  which  does  not 
require  the  exercise  of  this  power  cannot  be,  in  whole 
or  in  a  partial  sense,  a  public  business,  or  cannot  be 
regulated  by  government.  Any  business  which  is 
sufhciently  affected  with  a  public  interest  is  a  proper 
subject  for  regulation  by  government,  whether  the 
business  be  that  of  railroads,  navigation  companies, 
street  railways,  oil  pipe  Hnes,*  express  companies,  etc., 
or  merely  (for  example)  the  maintaining  of  pubhc 
warehouses.^ 

In  some  of  the  early  cases  involving  regulation  of 
railroad  rates  by  state  governments,  the  railroads  con- 
cerned claimed  that  they  were  exempted  by  their  charters 
from  such  regulation.  But  the  Supreme  Court  ruled, 
in  these  cases,  that  a  charter  could  not  be  presumed  to 

'  See  Smyth  v.  Ames,  169  U.  S.,  544. 
Ubid. 

'  Cf.  Smalley,  Railroad  Rale  Control,  Publications  of  the  American  Economic 
Association,  third  series,  Vol.  VII,  1906,  no.  2,  pp.  15,  16. 

*  See  the  recent  Pipe  Line  cases,  234  U.  S.,  548. 

*  See  Munn  v.  Illinois,  94  U.  S.,  130. 


DEVELOPMENT  OF   RATE   REGULATION     195 

confer  exemption  from  legislative  control.  On  the  con- 
trary, the  presumption  always  is  that  no  such  exemption 
was  intended.  Such  exemption  is  not  conferred  by  a 
clause  in  the  charter,  giving  a  company  the  right  to 
fix  its  rates,  unless  the  charter  also  contains  a  renuncia- 
tion by  the  state  of  its  regulating  power.^  The  various 
states  could  not,  of  course,  by  charters  or  in  any  other 
way,  guarantee  the  railroads  against  such  regulation 
as  falls,  constitutionally,  within  the  list  of  powers  of 
the  Federal  government.  The  most  that  a  state  could 
do  would  be  to  rehnquish  its  own  regulating  powers. 
But  the  court  will  not  hold  that  a  state  has  done 
even  this,  unless  there  is  clear  evidence  of  legislative 
intent. 

Both  the  states  and  the  Federal  government  are  limited 
in  their  rate-regulating  powers  by  the  constitutional 
prohibition  against  depriving  any  person  of  property 
without  due  process  of  law.  Rates  which  are  so  low 
as  to  be  confiscatory  are  unconstitutional.  Formerly, 
the  Supreme  Court  apparently  took  the  ground  that 
rates  fixed  by  legislation  could  not  be  set  aside  by  the 
courts  even  if  shown  to  be  unduly  low.-  In  later  de- 
cisions, however,  the  Supreme  Court  has  very  clearly 
upheld  the  view  that  unduly  low  government-made 
rates  may  be  unconstitutional  and  that  it  Hes  in  the 
power  of  the  Federal  courts  to  prevent  their  enforce- 
ment.^ 

*  See  RugRks  v.  Illinois,  io8  U.  S.,  541,  and  Slone  v.  Farmers'  Loan  and  Trust 
Co.,  116  U.  S.,  307 ;   both  cited  by  Smalley,  Railroad  Rate  Control,  p.  23. 

*  See,  for  example,  Munn  v.  Illinois,  94  U.  S.,  113;  Chicago,  Burlington  6* 
Quiney  Railway  Co.  v.  Iowa,  94  U.  S.,  155;  Pcik  v.  Chicago  b"  Northwestern 
Railway  Co.,  94  U.  S.,  164. 

*  See  Chicago,  Milwaukee  and  St.  Paul  Railway  Co.  v.  Minnesota,  134  U.  S. 
418;  Reagan  V.  Farmers'  Loan  &•  Trust  Co.,  154  U.  S.,  362;  Smyth  v.  Ames, 
169  U.  S.,  466.     See,  also,  article  by  Alton  D.  Adams  in  the  Journal  of  Political 


196    TRANSPORTATION  COSTS  OF  COMMERCE 

§2 

Rate  Regulation  by  the  State  Governments 

The  Constitution  of  the  United  States  gives  to  the 
Federal  government  the  power  to  regulate  commerce 
among  the  various  states  and  with  foreign  nations. 
There  is  left,  to  the  individual  states,  the  right  to  regu- 
late purely  intrastate  commerce.  Consequently,  there 
has  been  both  state  and  Federal  regulation  of  railroad 
rates.  And  state  regulation,  in  the  case  of  many  of  the 
states,  preceded  Federal  regulation  by  a  number  of 
years.  The  various  states  have  exercised  their  power 
over  commerce  by  making  discriminations  illegal,  by 
establishing  maximum  rates  and  fares,  and  by  creating 
commissions  to  act  as  regulating  bodies. 

The  commissions  estabUshed  by  the  states  to  super- 
vise intrastate  rates  have  usually  been  described  as  of 
two  types,  the  "weak"  and  the  "strong"  commissions. 
The  former  were  given  no  power  to  fix  rates.  They 
could  investigate  complaints  and  could  recommend 
changes,  but  could  not  enforce  their  views  unless  through 
pubhc  opinion  or  by  influencing  legislation.  Commis- 
sions of  this  kind  have  been  called  supervisory-advisory. 
The  so-called  "strong"  commissions  have  had  the  rate- 
regulating  power.  In  some  states  they  merely  correct 
unjust  rates  which  are  complained  of  or  which  their  in- 
vestigations show  to  be  discriminatory  or  unduly  high. 
In  other  states  it  is  further  made  the  duty  of  the  com- 
missions to  prescribe  complete  schedules  of  maximum 
rates.     The  tendency  of  state  legislation  during  the  last 

Economy,  December,  1903,  pp.  79-97,  on  Reasonable  Rates.  (Reprinted  in 
Ripley's  Railway  Problems,  revised  edition,  Boston  —  Ginn — ,1913,  pp.  S97~ 
618.) 


DEVELOPMENT  OF  RATE   REGULATION     197 

ten  or  fifteen  years  has  been  towards  the  stronger  or 
mandatory  type  of  railroad  (or  pubHc  service)  commis- 
sions. The  newly  created  commissions  have  nearly 
all  been  of  this  type.  And  even  states  which  had  long 
been  content  with  commissions  of  the  supervisory- 
advisory  class  have  increased  the  authority  over  rates 
conferred  upon  them.  Most  of  the  states  now  have 
mandatory  commissions. 

In  the  earher  days  of  state  railroad  regulation,  the 
states  endeavored  to  control  interstate  as  well  as  in- 
trastate rates.  This  they  did  by  fixing  the  rates  which 
must  be  charged  on  interstate  traffic  for  that  part  of 
the  haul  lying  within  the  state  or  states  legislating. 
Until  1886,  this  was  assumed  to  be,  in  the  absence  of 
Federal  legislation,  a  legitimate  exercise  of  state  author- 
ity. The  language  of  the  Supreme  Court  of  the  United 
States  in  the  case  of  Peik  v.  Chicago  and  Northwestern 
Railway  Company  ^  apparently  favored  this  view.  But 
in  1886,  in  the  case  of  the  Wabash,  St.  Louis  and  Pacific 
Railway  Company  v.  lUinois,^  the  court  decided  that 
the  individual  states  might  not  thus  regulate  the  rates 
charged  on  interstate  traffic.  This  decision  seemed  to 
emphasize  the  need  of  Federal  action  and  was  one  of  the 
important  influences  leading  to  the  enactment  of  the 
original  Interstate  Commerce  Act. 

Two  recent  decisions  on  Federal  versus  state  jurisdic- 
tion over  railroads  are  important  and  may  properly  be 
mentioned  at  this  point.  The  first  ^  involved  the  vaUdity 
of  rates  fixed  by  the  state  of  Minnesota,  through  its 
legislature  and  its  Railroad  Commission.  These  rates, 
it  was  complained  by  the  railroads,  upset  the  relative 

'94U.  S.,  164.  «ii8U.  S.,  557- 

*The  Minnesota  Rate  case,  230  U.  S.,  352. 


198    TRANSPORTATION  COSTS  OF  COMMERCE 

adjustment  of  rates  upon  interstate  and  intrastate 
trafl5c,  causing  discrimination  in  favor  of  the  latter 
and  against  the  former.  They  interfered,  therefore,  it 
was  urged,  with  interstate  commerce.  The  Supreme 
Court,  in  upholding  the  state's  right  to  regulate  such 
rates,  held  that  there  could  be  no  conflict  between  state 
and  Federal  regulation  but  that  the  authority  of  Con- 
gress over  interstate  commerce  and  its  instrumentality 
was  supreme  and  complete.  Whenever  state  regulation 
conflicted  with  the  exercise  of  this  authority,  state  regu- 
lation must  yield.  However,  Congress  had  intentionally 
left  the  regulation  of  purely  intrastate  rates  to  state 
control.  Until  Congress  itself  found  reason  to  extend 
its  authority  over  these  rates  as  a  necessary  means  of 
exercising  its  authority  over  interstate  commerce,  the 
power  of  the  several  states  to  regulate  must  be  upheld. 
Congress  had  established  the  Interstate  Commerce 
Commission  as  a  Federal  regulatory  body ;  and  if  rates 
made  by  Minnesota  caused  discrimination  against 
points  outside  of  the  state,  in  any  way  which  the  Inter- 
state Commerce  Act  made  illegal,  complaint  should  be 
made  to  the  Interstate  Commerce  Commission  and  not 
to  the  courts. 

In  the  Shreveport,  La.,  case,^  the  Supreme  Court 
upheld  a  ruling  of  the  Interstate  Commerce  Commis- 
sion fixing  the  relation  between  certain  intrastate  rates 
which  had  been  made  unduly  low  by  the  Texas  Railroad 
Commission,  and  certain  interstate  rates.  The  power 
to  deal  with  the  relation  between  such  rates,  as  a  rela- 
tion, was  declared  to  He  with  Congress  and  therefore,  of 
course,  with  that  body  (the  Commission)  to  which  Con- 
gress had  delegated  its  powers  of  control. 

»  234  U.  S.,  342. 


DEVELOPMENT  OF   RATE   REGULATION    199 

§3 
The  Interstate  Commerce  Act  of  iSSy 

The  Federal  law  of  1887  applied  to  all  interstate  rail- 
road transportation,  to  all  rail  transportation  of  goods 
to  be  exported,  or  of  imported  goods,  and  likewise  to 
transportation  "partly  by  railroad  and  partly  by  water 
when  both  are  used  under  a  common  control,  manage- 
ment, or  arrangement  for  a  continuous  carriage  or  ship- 
ment"; except  that  the  carriers  transporting  goods 
between  the  United  States  and  a  non-adjacent  foreign 
country  are  not  subject  to  this  law.  In  its  first  section, 
the  Interstate  Commerce  Law  declared  that  all  charges 
should  be  reasonable  and  that  unjust  and  unreasonable 
charges  were  illegal. 

Section  two  declared  illegal  any  discrimination  in  the 
charges  to  different  shippers  or  passengers  for  like  and 
contemporaneous  services,  by  means  of  any  special 
rate,  rebate,  drawback,  or  other  device.  The  purpose 
of  this  clause  was  undoubtedly  to  prohibit  unfair 
discriminations  between  shippers  by  any  means  what- 
ever, to  "  strike  through  all  pretense,  all  ingenious 
device,  to  the  substance  of  the  thing  itself,"  ^  and 
the  Interstate  Commerce  Commission  has  so  inter- 
preted it. 

Section  three  of  the  Act  of  1887  forbade  the  giving 
of  any  undue  preference  or  advantage  to  any  person, 
corporation,  locality,  or  particular  description  of  trafl5c. 
The  prohibition  against  discrimination  between  places 
the  Commission  has  interpreted  to  mean  that  rates  which 
deprive  any  city  or  town  of  the  benefits  flowing  from  its 

1  Interstate  Commerce  Reports,  Vol.  X,  p.  402  (pp.  385-404  for  entire 
case). 


200    TRANSPORTATION  COSTS  OF  COMMERCE 

location  or  other  natural  advantages  are  unlawful.^ 
The  prohibition  against  discrimination  between  different 
kinds  of  goods  has  been  applied  to  prevent  an  undue 
difference  in  the  rates  charged  for  carrying  such  com- 
petitive articles  as  Pearline  and  common  soap,-  and, 
also,  to  prevent  too  great  a  difference  in  the  charges 
for  transporting  raw  materials  and  their  finished  prod- 
ucts, e.g.  wheat  and  flour.^ 

Section  four  of  the  law  is  the  "  long  and  short  haul 
clause."  This  section  made  it  "  unlawful  for  any  com- 
mon carrier  subject  to  the  provisions  of  this  act  to  charge 
or  receive  any  greater  compensation  in  the  aggregate 
for  the  transportation  of  passengers  or  of  like  kinds  of 
property,  under  substantially  similar  circumstances  and 
conditions,  for  a  shorter  than  for  a  longer  distance  over 
the  same  line,  in  the  same  direction,  the  shorter  being 
included  within  the  longer  distance."  The  Interstate 
Commerce  Commission  was  given  power  to  suspend 
the  operation  of  the  fourth  section,  in  special  cases, 
when  investigation  showed  that  conditions  warranted 
such  suspension. 

In  general,  the  first  four  sections  of  the  law  had  to  do 
with  the  regulation  of  rates,  and  laid  down  the  require- 
ments that  the  charges  made  by  railroads  for  transport- 
ing goods  and  passengers  in  interstate  commerce  should 
not  be  unreasonably  high  and  should  not  be  discrimina- 
tory. 

Section  five  of  the  law  made  it  illegal  for  railroads  to 

1  See,  for  instance,  Eau  Claire  Lumber  case.  Interstate  Commerce  Commission 
Reports,  Vol.  V,  pp.  264-298.     See  also  Chapter  IV  of  this  book. 

'  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  465-479.  See  dis- 
cussion in  Chapter  VI  of  this  book,  §  i. 

'  See  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  214-276.  See  discussion 
in  Chapter  VI  of  this  book,  §  2.     ' 


DEVELOPMENT  OF  RATE  REGULATION    201 

pool  their  freights  or  their  aggregate  net  earnings. 
Taken  in  conjunction  with  the  Anti-trust  Act  of  1890 
(and  the  Clayton  Act  of  1914),  it  was  calculated  to  make 
illegal  any  monopolistic  arrangement  between  what 
would  else  be  competing  companies.  Furthermore,  the 
Panama  Canal  Act  of  191 2  contains  a  provision  that 
no  railroad  may  own,  operate,  control,  or  have  any 
interest  in  a  competing  water  line. 

Section  six  required  the  printing  and  keeping  open  to 
public  inspection  of  all  rates  and  fares.  Furthermore, 
all  rates  and  fares,  joint  tariffs,  and  notice  of  rate  changes 
were  required  to  be  filed  with  the  Interstate  Commerce 
Commission.  A  ten  days'  notice  was  required  of  any  ad- 
vance in  these  printed  rates  and  fares  and  a  three  days' 
notice  of  reduction  (Amendment  of  1889).  Longer  notice 
(30  days)  is  now  required  for  changes  in  either  direction. 

By  the  law  of  1887,  discrimination  between  shippers 
could  only  be  proved  legally  by  the  presentation  of 
evidence  that  one  shipper  had  actually  been  charged  a 
lower  rate  than  another.  A  railroad  might,  when  ac- 
cused of  charging  any  shipper  less  than  the  published 
rates,  maintain  that  if  less  than  published  rates  were 
asked  of  other  shippers  also,  no  discrimination  had  been 
practiced.  This  made  it  very  difficult  to  convict  rail- 
roads of  discrimination.  The  Elkins  Law  of  1903  made 
the  gist  of  the  offense  a  departing  from  the  published 
rate.  The  Elkins  Law  also  made  the  recipient  as  well 
as  the  giver  of  a  discrimination  criminally  responsible, 
and  it  made  corporations  Hable  to  punishment  as  well 
as  their  agents,  who  alone  had  been  guilty  under  the 
law  of  1887  when  the  common  carrier  disobeying  the 
law  was  a  corporation.  The  Elkins  Law  abolished 
imprisonment  as  a  penalty,  providing  merely  for  fines 


202    TRANSPORTATION  COSTS  OF  COMMERCE 

of  from  $1000  to  $20,000  for  each  offense.  The  penalty 
of  imprisonment  has  since  been  restored.^  Fines  remain, 
however,  the  only  punishment  for  minor  offenses. 

A  number  of  sections  of  the  Interstate  Commerce  Act 
prescribed  the  makeup  of  the  Interstate  Commerce 
Commission  and  defined  its  duties.  It  was  to  be  com- 
posed of  five  members,  appointed  by  the  President  of 
the  United  States  with  the  consent  of  the  Senate.  Not 
more  than  three  were  to  be  of  any  one  political  party. 
The  Commissioners  could  not  own  railway  securities 
nor  could  they,  while  holding  office,  engage  in  any  other 
business.  They  were  to  be  appointed  for  terms  of  six 
years  and  were  to  receive  $7500  salary,  each.  In  general, 
it  was  to  be  the  duty  of  the  Commission  to  enforce  the 
law  by  specifically  forbidding  such  rates  or  rate  prac- 
tices as  seemed  to  be  unreasonable  or  discriminatory. 
It  was  given  power  to  investigate  and,  to  that  end, 
could  require  of  railroads  the  production  of  books  and 
papers  and  the  giving  of  testimony.  The  law  originally 
stated  that  no  witness  might  refuse  his  testimony  even 
if  it  criminated  himself ;  but  such  testimony  was  not 
to  be  used  against  him  in  any  criminal  proceeding. 
But  before  the  courts  would  hold  that  the  witness' 
constitutional  right  not  to  testify  against  himself  was 
guaranteed,^  Congress  had  to  pass  a  supplementary  law 
(in  1893)  giving  the  witness  protection  against  any 
prosecution,  civil  or  criminal,  on  account  of  any  testi- 
mony submitted. 

One  of  the  weaknesses  of  the  Interstate  Commerce 
Law,  in  its  original  form,  was  the  fact  that  orders  of  the 
Interstate   Commerce   Commission,   as   to   rates,   etc., 

*  See  §  4  of  this  Chapter. 

» See  Counselman  v.  Hitchcock,  142  U.  S.,  547. 


DEVELOPMENT  OF  RATE   REGULATION    203 

could  be  enforced  only  by  appeal  of  the  Commission 
to  a  United  States  circuit  court.  In  consequence,  the 
railroads  could  ignore  the  Commission's  orders,  in  each 
case,  until  the  matter  had  been  carried  through  this 
court  and,  on  appeal,  through  the  Supreme  Court. 
In  the  meanwhile  —  several  years  having  perhaps 
elapsed  —  the  injured  shipper  who  had  brought  the 
complaint  might  be  driven  out  of  business  by  the  con- 
tinuance of  the  rate  or  rate  practice  complained  of. 
This  weakness  of  the  law  was  corrected  in  1906.^ 

Again,  the  law  stated  that  in  the  consideration  before 
the  court,  of  an  Interstate  Commerce  Commission 
order,  the  Commission's  findings  as  to  facts  were  to 
be  accepted  as  prima  facie  evidence.  Nevertheless,  the 
courts  allowed  new  evidence  to  be  brought  in.  Hence, 
railroads  sometimes  reserved  part  of  their  testimony  for 
the  court  hearings.  In  the  absence  of  such  testimony, 
the  Commission  might  give  a  decision  adverse  to  a 
railroad,  only  to  have  its  decision  discredited  and  over- 
ruled by  the  court  to  which  all  the  evidence  was  later 
presented.  More  recent  legislation  and  judicial  ruling 
have  done  away  with  this  practice.^ 

While  the  Interstate  Commerce  Commission  was,  as 
above  pointed  out,  to  bring  action  before  a  Federal 
circuit  court  for  the  purpose  of  enforcing  its  own  orders, 
yet  criminal  prosecutions  for  offenses  against  this  and 
other  Federal  laws  are  brought  by  the  Federal  Depart- 
ment of  Justice. 

The  Interstate  Commerce  Act,  as  passed  in  1887, 
required  that  an  annual  report  be  made  to  the  Commis- 
sion by  each  carrier  subject  to  the  act,  containing 
statistical   information   as   to   capitalization,   expenses, 

»  See  §  4  of  this  Chapter.  « Ibid. 


204    TRANSPORTATION  COSTS  OF  COMMERCE 

financial  standing,  etc.  The  Commission  was  formally 
given  power  to  prescribe  a  uniform  system  of  keeping 
accounts,  but,  as  the  law  did  not  confer  on  the  Commis- 
sion the  power  to  inspect  and  audit  accounts,  no  attempt 
was  made,  until  after  the  amendment  of  1906  ^  was 
passed,  to  prescribe  an  accounting  system. 

We  have  seen  that  the  Interstate  Commerce  Act 
forbade  unreasonably  high  as  well  as  unjustly  discrimi- 
natory rates,  and  established  a  Commission  to  decide  in 
individual  cases  whether  rates  and  fares  were  just  and 
reasonable ;  that  this  Commission  might  investigate 
rates  and  practices  either  after  complaint  or  upon  its 
own  initiative ;  and  that  it  might  order  carriers  to 
desist  from  charging  unjust  rates  or  engaging  in  illegal 
practices.  For  a  number  of  years  the  Commission  in- 
terpreted these  provisions  of  the  law  to  mean  (among 
other  things),  that  in  ordering  a  carrier  to  desist  from 
charging  an  unreasonable  rate,  it  (the  Interstate  Com- 
merce Commission)  might  name  a  maximum  rate  above 
which  the  carrier  could  not  charge.  But  in  1897,  the 
Supreme  Court,  in  the  Maximum  Rate  case,^  decided 
that  though  Congress  might,  if  it  chose,  have  conferred 
such  a  power  upon  the  Commission,  the  wording  of  the 
statute  did  not  indicate  any  such  intention.  The  Com- 
mission has  since,  however,  been  given  this  power.^ 

The  fourth  section  of  the  law,  also,  was  so  interpreted 
by  the  Supreme  Court  as  greatly  to  lessen  the  regulating 
power  of  the  Commission.  This  section,  in  the  form 
given  to  it  in  1887,  forbade  railroads  to  charge  more, 
under  substantially  similar  circumstances  and  conditions, 

*  See  §  4  of  this  Chapter. 

*  Interstate  Commerce  Commission  v.  Cincinnati,  New  Orleans  and  Texas  Pa- 
cific Railway,  167  U.  S.,  47g. 

'  See  §  4  of  this  Chapter. 


DEVELOPMENT  OF  RATE  REGULATION    205 

for  a  shorter  haul  than  for  a  longer,  over  the  same  hne 
and  in  the  same  direction,  the  shorter  haul  being  included 
in  the  longer.  The  Interstate  Commerce  Commission 
itself  took  the  view  that  higher  charges  might  be  allow- 
able for  the  shorter  distance  traffic  if  low  rates  over  the 
longer  distance  were  forced  by  the  competition  of  a 
water  route,  or  of  railways  (e.g.  foreign  railways)  not 
subject  to  the  Interstate  Commerce  Act,  or  in  certain 
"rare  and  peculiar  cases,"  as  when  one  of  the  railways 
concerned  was  comparatively  roundabout,  of  competi- 
tion between  railroads  subject  to  the  statute.^  But  the 
Supreme  Court  interpreted  the  ciuahfying  phrase  more 
broadly,  pointing  out  that  competition  between  different 
railways  should  always  be  taken  into  account  in  deciding 
whether  circumstances  and  conditions  were  substantially 
the  same  or  different  for  the  longer  than  for  the  shorter 
distance  traffic,-  and  that  competition  which  was  real 
and  substantial,  and  which  exercised  a  potential  influence 
over  rates  to  the  longer  distance  point,  made  the  con- 
ditions substantially  dissimilar.^  The  present  (amended) 
law,^  however,  gives  to  the  Commission  the  jurisdiction 
which  its  members,  previous  to  the  court's  interpreta- 
tion of  the  old  law,  believed  they  possessed. 

§4 

The  Amendment  of  igo6 

The  various  weaknesses  in  the  law  of  1887  caused 
considerable  dissatisfaction  and  brought,  eventually,  a 

'  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  31-85. 

'  Interstate  Commerce  Commission  v.  Alabama  Midland  Railway  Company  el 
al.,  168  U.  S.,  144- 

'  East  Tennessee,  Va.,  and  Ga.  RR.  Co.  v.  Interstate  Commerce  Commission, 
181  U.  S.  19.  *  See  §  s  of  this  Chapter. 


2o6    TRANSPORTATION   COSTS  OF  COMMERCE 

popular  agitation  sufficiently  strong  to  compel  amend- 
ment. The  so-called  Hepburn  Law  of  1906  extended 
the  authority  of  the  Interstate  Commerce  Commission 
over  express  companies,  sleeping-car  companies,  pipe 
lines  for  the  transportation  of  oil  ^  and  other  commodi- 
ties (excepting  water  and  gas),  and  private  car  lines. 
The  private  car  lines  were  definitely  placed  under  the 
regulating  power  of  the  Commission  because  charges 
for  refrigeration,  icing,  and  special  forms  of  packing  had 
been  exorbitant,  and  because  carriers  had  refused  to 
pubUsh  their  refrigeration  charges,  contending  that  icing 
and  similar  services  were  of  a  private  nature  and  not 
subject  to  the  Commission's  control.  Separate  publica- 
tion is  now  required  of  terminal,  storage,  and  icing 
charges  and  of  the  charges  for  any  other  facilities  or 
privileges  granted. 

We  saw,  in  the  last  chapter,^  that  advantages  to  cer- 
tain shippers  have  sometimes  been  given,  and  conceal- 
ment attempted,  through  the  use  of  what  have  been 
called  ''industrial"  or  "tapline"  or  "terminal"  rail- 
roads. Such  a  "railroad"  would  be  owned  by  the  cor- 
poration seeking  the  discrimination  and  would  receive 
excessive  pay  for  its  services,  even,  perhaps,  a  division 
of  a  through  rate.  The  corporation  which  owned  it 
would  be  the  real  beneficiary.  Under  the  old  law,  the 
Commission  had  not  hesitated  to  deal  with  this  kind  of 
situation  as  being  a  violation  of  the  prohibition  against 
discrimination  between  shippers,  as  being  a  mere  device 
to  evade  the  law.^    But  the  Act  of  1906  definitely  ex- 

>  In  the  recent  Pipe  Line  cases,  the  Supreme  Court  upheld  the  clause  of  the 
law  making  pipe  lines  common  carriers  and  subject  to  regulation  as  such, 
thereby  reversing  a  decree  of  the  Commerce  Court.     See  234  U.  S.,  548. 

Hi- 

>  Interstate  Commerce  Reports,  Vol.  X,  pp.  385-404. 


DEVELOPMENT  OF  RATE  REGULATION     207 

tended  the  jurisdiction  of  the  Commission  over  all  such 
terminal  or  connecting  lines,  formally  giving  that  body 
the  power  to  determine  a  proper  switching  charge  or  a 
proper  division  of  a  through  rate.  Further  to  limit 
possible  discrimination,  the  amended  law  requires  that  if 
a  branch  line  or  a  shipper  makes  application  to  a  rail- 
road for  a  switch  connection,  and  if  such  a  connection  is 
reasonably  practicable  and  is  warranted  by  the  amount 
of  business,  the  railroad  applied  to  must  furnish  the 
connection.  The  Interstate  Commerce  Commission, 
after  investigation,  may  order  such  a  switch  connection 
to  be  made. 

We  saw,  also,  in  the  last  chapter,^  that  discrimination 
in  fact  if  not  in  form  might  arise,  and  had  apparently 
arisen  in  some  cases,  from  the  ownership,  by  railroads, 
of  producing  corporations,  particularly  from  railroad 
ownership  of  coal  mines.  The  Hepburn  Law  endeavored 
to  make  impossible  discrimination  so  arising,  by  inter- 
fering with  the  railroad  ownership  of  other  business. 
The  so-called  "commodities"  clause  of  the  law  accord- 
ingly provided  that  after  May  i,  1908,  no  railroad  should 
be  allowed  to  transport  in  interstate  commerce,  any 
commodity  other  than  timber  and  its  manufactured 
products,  produced  by  it  or  under  its  authority,  or 
which  it  might  own  in  whole  or  in  part,  or  in  which  it 
might  have  any  interest  direct  or  indirect,  except  so 
much  as  might  be  intended  for  the  railroad's  own  use 
as  a  common  carrier.  The  Supreme  Court,  however, 
in  the  case  of  United  States  v.  Delaware  and  Hudson  Rail- 
road Company,"^  declared  that  the  mere  fact  of  a  rail- 
road owning  stock  in  a  coal  mining  company,  did  not, 
irrespective  of  the  amount  of  that  stock  or  of  other 

1  §  3.  »  213  u.  S.,  366. 


2oS    TRANSPORTATION  COSTS  OF  COMMERCE 

facts,  imply  that  the  raihoad  owned  the  coal  either 
directly  or  indirectly.  It  might,  therefore,  transport 
it.  Also,  it  might  transport  coal  which  it  had  previously 
owned,  provided  that  it  sold  this  coal  to  some  other 
company  before  transporting  it.  This  decision  greatly 
weakened  the  force  of  the  law.  But  the  court  apparently 
did  not  intend  so  to  interpret  it  as  to  make  it  of  no  effect, 
for  in  the  case  of  United  States  v.  Lehigh  Valley  Rail- 
roads^ following  not  long  after  the  other,  it  was  declared 
that  ownership  of  practically  all  the  stock  of  a  coal 
company  by  a  railroad,  and  parallel  officering  of  the 
coal  company  and  the  railroad  company,  made  the  two 
corporations  for  all  practical  purposes  one  corporation; 
and  that  in  such  a  case,  the  railroad  owned  the  coal 
and  could  not  legally  transport  it.  Thus  far.  Con- 
gress has  not  seen  fit  to  amend  the  clause  so  as  to 
prohibit  stock  ownership  by  railways  in  producing  cor- 
porations. 

Under  the  Act  of  1887,  free  transportation  had  been 
declared  by  the  Interstate  Commerce  Commission,  in 
some  instances,  to  be  illegal,  as  being  a  violation  of  the 
general  prohibition  of  discrimination. ^  But  the  Act  of 
1906  definitely  and  formally  prohibited  free  passes  and 
tickets,  except  to  railroad  employees  and  their  families, 
express,  telegraph,  and  postal  service  officials,  care- 
takers of  live  stock,  etc.,  the  poor  and  unfortunate 
classes,  and  those  engaged  in  religious  and  charitable 
work. 

The  law  also  strengthened  the  provisions  of  the  Elkins 

»  220  U.  S.,  257.  See,  also,  the  recent  derision  (June  21,  igis)  in  the  case  of 
United  Stales  v.  Delaware,  Lackawanna  and  Western  Railroad  Co.  and  the  Dela- 
ware, Lackawawui  and  Western  Coal  Co.,  35  Supreme  Court  Reporter,  873. 

*  See  Interstate  Commerce  Commission  Reports,  Vol.  V,  pp.  69-83.  See  §  3 
of  this  Chapter  for  statement  of  this  general  prohibition. 


DEVELOPMENT  OF   RATE   REGULATION    209 

Act  of  1893,  by  making  both  giver  and  receiver  of  an 
illegal  rale  liable  to  imprisonment  as  well  as  to  a  fine. 
In  addition  to  this  penalty,  the  recipient  of  a  rate  favor 
must  now  forfeit  to  the  government  three  times  the  value 
of  the  reduction  enjoyed. 

A  most  important  addition  to  the  power  of  the  Inter- 
state Commerce  Commission  was  made  by  a  clause 
conferring  the  right  to  fix  maximum  rates  for  trans- 
portation. We  have  already  seen  ^  that  the  Commission 
endeavored  to  exercise  this  power  under  the  old  law  but 
was  prevented  by  a  decision  of  the  Supreme  Court  from 
so  doing.  The  Commission  now  establishes  maximum 
joint  rates  as  well  as  maximum  rates  for  transportation 
over  a  single  railroad,  and  it  may  prescribe  the  division 
of  such  joint  rates  among  the  carriers  concerned.  It 
may  establish  through  routes,  and  this  it  may  do  when 
one  of  the  connecting  carriers  is  a  water  line.  The  Com- 
mission may  now,  also,  determine  the  maximum  charge 
to  be  paid  by  a  carrier  for  any  service  rendered  or  in- 
strumentality provided  by  a  shipper.  This  makes  it 
clearly  possible  for  the  Commission  to  prevent  such 
discrimination  as  might  result,  for  instance,  from  the 
payment  of  undue  rental  by  a  railroad  for  the  use  of  a 
shipper's  cars,  though  such  undue  rental  would  have 
been  unlawful  before  1906  as  being  a  mere  device  for 
giving  a  discriminating  rate.  The  later  statute  simply 
puts  beyond  question,  in  this  regard,  a  power  which 
the  Commission  was  previously  exercising. 

The  law  of  1906  made  an  important  change  relative 
to  the  enforcement  of  the  Commission's  orders.  An 
order  of  the  Commission  now  goes  into  effect,  and  pun- 
ishment for  ignoring  it  begins  to  run  30  days  (or  such 

1  §  3  of  this  Chapter. 


2IO    TRANSPORTATION  COSTS  OF  COMMERCE 

longer  time  as  the  Commission  may  designate)  after 
the  order  is  promulgated.  The  penalty  for  disobedience 
is  $5000  for  each  offense,  and  each  day  of  delay  is  a 
separate  offense.  Hence,  a  railroad  cannot  afford  to 
ignore  an  order  until  the  Commission  has  carried  the 
matter  to  a  court.  But  the  railroad  may  itself  appeal, 
and,  if  it  does  so  before  the  30  days  are  up,  the  order 
does  not  go  into  effect  until  the  appeal  is  heard  and 
decided.  The  law  of  1906  gave  jurisdiction  to  the 
Federal  circuit  courts  to  enjoin,  set  aside,  or  suspend 
orders  of  the  Interstate  Commerce  Commission  after  a 
hearing  preceded  by  5  days'  notice  to  the  Commission. 
Various  passages  in  the  law  appear  to  indicate  the  in- 
tention of  Congress  that  investigations  as  to  the  facts 
in  each  case  shall  be  carried  on  by  the  Interstate  Com- 
merce Commission  and  not  by  the  courts,  and  that  the 
courts  shall  not  set  aside  orders  of  the  Commission  as 
to  rates  and  other  matters,  except  when  these  orders 
are  outside  of  the  Commission's  legal  power  to  make  or 
are  unconstitutional.  This  view  of  the  law  seems  now 
to  be  that  of  the  Supreme  Court.^ 

In  place  of  10  days'  notice  of  advance  and  3  days' 
notice  of  reduction  in  rates,  the  law  now  requires  30 
days'  notice  in  either  case.  It  is,  therefore,  less  easy 
than  before  to  make  a  temporary  reduction  which  only 
a  single  shipper  will  know  about  ("midnight  tariff")  and 
by  means  of  which  he  may  secure  an  advantage  over 
competitors.  Both  rates  made  by  a  single  Hne  and 
joint  rates  must  be  filed  with  the  Interstate  Commerce 
Commission  and  must  be  publicly  posted,  and,  when 
joint  rates  have  not  been  estabhshed,  each  carrier  must 

1  See  Inter  stale  Commerce  Commission  v.  Illinois  Central  Railroad  Company, 
215  U.  S.,  452. 


DEVELOPMENT  OF   RATE   REGULATION    211 

file  the  rates  which  it  applies  to  through  transportation. 
The  rate  schedules  filed  must  also  state,  separately, 
all  terminal,  storage,  and  icing  charges,  and  all  priv- 
ileges and  regulations  which  may  affect  the  service 
rendered. 

The  Amendment  of  1906  made  effective  the  provision 
of  the  old  law  giving  the  Interstate  Commerce  Commis- 
sion the  authority  to  prescribe  accounting  methods.  As 
we  have  seen,^  there  was,  in  the  law  of  1887,  no  way 
provided  to  compel  the  railroads  to  conform  to  a  pre- 
scribed system.  Hence  the  Commission  did  not  attempt 
to  establish  an  accounting  system.  The  law  now  pro- 
vides penalties  for  failure  to  conform  or  for  refusal  to 
submit  books  to  the  inspection  of  the  Commission's 
examiners.  The  Commission  has,  therefore,  prescribed 
an  accounting  system  to  be  followed  by  all  railroads 
engaged  in  interstate  business.  (This  includes  prac- 
tically all,  if  not  all,  steam  railroads  in  the  United 
States,  since  a  railroad  which  carries  interstate  shipments 
even  over  a  short  intrastate  line,  is  engaging  in  inter- 
state traffic.)  The  Commission  has  access  at  all  times 
to  the  railroads'  books,  and  may  employ  special  exam- 
iners, and  require  monthly  or  special  reports.  No  ac- 
counts, records,  or  memoranda  may  be  kept  by  the 
carriers  except  such  as  are  prescribed  or  approved  by  the 
Commission.  Fine  and  imprisonment  may  follow  viola- 
tion of  this  rule.  Fine  or  imprisonment  or  both  may  be 
imposed  upon  any  persons  who  wilfully  falsify  or  mutilate 
records  or  who  neglect  to  make  the  proper  entries. 
These  accounting  provisions  of  the  law  serve  a  double 
purpose.  In  the  first  place,  they  make  difficult  the 
concealment  of  illegal  rates  and  favors.     And  secondly, 

'  §  3  of  this  Chapter. 


212     TRANSPORTATION   COSTS  OF  COMMERCE 

they  facilitate  investigations  as  to  the  financial  sound- 
ness of  railroads  by  prospective  investors. 

The  Act  of  1906  also  enlarged  the  membership  of  the 
Interstate  Commerce  Commission  to  seven,  of  whom 
not  more  than, four  might  be  of  the  same  political  party. 
It  extended  the  term  of  office  to  seven  years,  and  it 
raised  the  salary  of  the  ofl&ce  of  Commissioner  to  $10,000. 

§5 
The  Amendment  oj  igio 

The  Interstate  Commerce  Law  was  further  amended 
in  1910.  One  of  the  most  important  changes  made 
related  to  section  four,  the  "long  and  short  haul  clause." 
The  amended  act  omits  the  words  "under  substantially 
similar  circumstances  and  conditions,"  so  that  it  is 
now  illegal  under  any  conditions  for  a  railroad  to  charge 
more  for  a  shorter  haul  than  for  a  longer,  over  the  same 
line  and  in  the  same  direction,  the  shorter  haul  being 
included  within  the  longer,  unless  the  Interstate  Com- 
merce Commission  permits  such  higher  charge.  We 
have  already  seen  ^  that  discrimination  of  this  sort 
may  sometimes  be  economically  defensible.  But  it 
was  felt  that,  under  the  old  law  as  interpreted  by  the 
Supreme  Court,  such  discrimination  could  go  on  where 
there  was  no  really  substantial  economic  justification  for 
it  and  where  it  could  easily  be  prevented  by  a  proper  law. 

It  was  under  the  provisions  of  the  amended  fourth 
section  that  the  Commission  made  its  ruHng,  sum- 
marized in  Chapter  V,^  with  regard  to  discrimination  in 
favor  of  Pacific  Coast  points  and  adverse  to  far  western 
intermediate  points.     Water  competition  from  coast  to 

»  Chapter  V.  »  §  4. 


DEVELOPMENT  OF   RATE  REGULATION    213 

coast  had  caused  the  putting  into  effect  of  low  through 
rates.  These  low  rates  had  been  made  to  apply  from 
middle  western  points,  such  as  St.  Louis,  as  well  as  from 
New  York,  Baltimore,  Pittsburg,  etc.  The  Interstate 
Commerce  Commission,  in  making  a  decision  on  the 
matter,^  recognized  that  the  conditions  were  such  as 
might  justify  a  certain  amount  of  discrimination  but 
endeavored  to  limit  the  extent  to  which  it  should  be 
practiced.  The  Commission  ruled  that  from  Atlantic 
Coast  points  rates  to  intermediate  far  western  points 
should  not  exceed  rates  to  the  Pacific  Coast  by  more 
than  25  per  cent.,  that  from  Buffalo  and  Pittsburg  terri- 
tory the  corresponding  difference  should  not  be  more 
than  15  per  cent.,  that  from  Chicago  territory  it  should 
not  be  in  excess  of  7  per  cent,  and  that  from  Missouri 
River  points  the  rates  to  far  western  points  not  on  the 
coast  should  not  at  all  exceed  rates  to  the  coast .^  The 
fourth  section  of  the  Interstate  Commerce  Act  specifically 
gives  the  Commission  the  power  to  prescribe  the  extent 
to  which  the  long  and  short  rule  may  be  departed  from. 
Nevertheless,  this  particular  decision  of  the  Interstate 
Commerce  Commission  was  overruled  by  the  Commerce 
Court,  in  the  Intermountain  Rate  cases,^  largely  on  the 
ground  that,  although  the  Commission  was  empowered 
by  Congress  to  permit  departures  from  the  long  and 
short  haul  principle,  it  was  not  empowered  to  determine 
any  exact  relation  between  different  rates  and  was  there- 
fore exceeding  its  authority.     But  the  right  of  the  Com- 

>  Interstate  Commerce  Commission  Reports,  Vol.  XXI,  pp.  320-384. 

'  This  order  was  modified  somewhat,  as  to  certain  heavy  commodities  likely 
to  move  by  water,  early  in  1915.  The  modification  was  for  the  purpose  of  allow- 
ing the  railroads  more  easily  to  meet  competition  via  the  Panama  Canal.  (See 
Interstate  Commerce  Commission  Reports,  Vol.  XXXII,  pp.  611-658.) 

'  See  igi  Fed.  Rep.,  856. 


214    TRANSPORTATION  COSTS  OF  COMMERCE 

mission  to  make  such  an  order  was  upheld,  on  appeal, 
by  the  Supreme  Court.^ 

The  new  law,  also,  discouraged  efforts  of  railroads  to 
force  out  water  competition  by  temporarily  carrying 
goods  at  unremunerative  rates.  It  required  that  rates 
reduced  during  competition  with  water  transportation 
lines  should  not  be  restored  to  their  former  level  until 
after  a  hearing  before  the  Interstate  Commerce  Com- 
mission, and  that  before  restoration  of  the  rates  should 
be  allowed,  changed  conditions  must  be  shown,  other 
than  the  elimination  of  water  competition. 

The  power  to  fix  maximum  rates  in  individual  cases, 
after  hearing  given  to  the  Interstate  Commerce  Com- 
mission in  1906,  was  extended  in  19 10  so  as  to  authorize 
the  Commission  to  suspend  proposed  rate  changes. 
Whenever  any  new  rate,  fare,  or  classification,  or  any 
regulation  affecting  a  rate,  is  filed  with  the  Commission, 
that  body  may,  either  upon  complaint  or  upon  its  own 
motion,  undertake  a  hearing.  It  may  suspend  the  op- 
eration of  the  rate  or  regulation  temporarily,  i.e.  during 
the  hearing,  for  not  more  than  120  days  beyond  the 
time  when  it  would  otherwise  go  into  effect,  and,  if 
the  hearing  is  not  then  completed,  for  a  further  period 
of  six  months.  It  may  then,  having  heard  the  evidence, 
either  allow  or  forbid  the  change. 

Since  rate  schedules  are  now  numerous  and  exceedingly 
complicated,  it  is  provided,  in  section  six  of  the  law, 
that  a  shipper  may  ask  for  a  written  statement  from  a 
carrier,  of  the  rate  between  stated  places,  under  tariffs 
to  which  the  carrier  in  question  is  a  party,  and  that 
such  a  written  statement  must  be  given.  Refusal  or 
neglect  to  give  such  a  written  statement,  as  a  consequence 
1  234  u.  s.,  476. 


DEVELOPMENT  OF  RATE   REGULATION    215 

of  which  the  shipper  suffers  loss  or  damage,  subjects  the 
carrier  to  a  penalty  of  $250,  which  goes  to  the  United 
States  government.^ 

The  anti-pass  clause  has  been  changed  by  the  inclusion 
among  those  who  may  receive  free  transportation,  of 
necessary  caretakers  of  milk,  and  by  making  the  term 
''employees"  include  the  disabled,  infirm,  pensioned 
and  superannuated  and  their  families,  the  bodies  of 
employees  killed  in  service,  the  families  of  such  em- 
ployees, and  the  widows  and  minor  children  of  employees 
who  die  while  in  employment. 

It  has  been  made  a  misdemeanor  for  any  common 
carrier,  or  any  agent  or  employee  of  a  common  carrier, 
to  give  any  information  concerning  the  nature,  route,  or 
destination  of  the  shipments  of  any  shipper,  when  such 
information  might  be  used  to  the  injury  of  that  shipper 
and  to  the  benefit  of  a  competitor.  For  any  person  to 
solicit  such  information  is  Ukewise  unlawful.  Such 
espionage  has  at  times  been  practiced  by  powerful  firms 
as  a  means  of  getting  information  regarding  the  business 
of  smaller  rivals,  in  order  that  the  competition  of  the 
latter  might  be  crushed. 

Another  of  the  changes  made  by  the  new  law  was  the 
creation  of  a  Court  of  Commerce,  to  which  appeals  from 
the  decisions  of  the  Interstate  Commerce  Commission 
should  be  carried  instead  of  to  the  various  circuit  courts. 
It  was  beUeved  that  such  a  special  court  would  be  more 
efl5cient  than  the  circuit  courts,  before  which  other  busi- 
ness also  came,  and  that  the  absence  of  other  and  some- 
times prior  business  would  tend  to  avoid  delay.  But 
the  Commerce  Court  showed  a  disposition  to  decide 

*  If  it  were  to  go  to  the  shipper,  the  law  might  be  used,  by  conspiracy  with  the 
railroad,  so  as  to  gain  what  would  be,  in  fact,  a  rebate. 


2i6    TRANSPORTATION  COSTS  OF  COMMERCE 

cases  adversely  to  the  Commission's  power  {e.g.  in  the 
Intermountain  Rate  cases,  above  cited)  and  so  aroused 
criticism.  Furthermore,  it  did  not  appear  necessary  to 
maintain  a  special  court  for  the  purposes  required.  Ac- 
cordingly, this  court  was  abolished  by  an  act  of  October, 
1 913,  and  (the  circuit  courts  having  meanwhile  been 
dropped^  from  the  Federal  judiciary)  its  functions 
transferred  to  the  various  Federal  district  courts. 

In  1 910,  the  provisions  of  the  Interstate  Commerce 
Act  were  again  extended,  so  as  to  apply  to  telegraph, 
telephone,  and  cable  business,  including  wireless  teleg- 
raphy. 

§6 

Later  Legislation 

The  Panama  Canal  Act  of  191 2  added  still  further  to 
the  authority  over  joint  rail  and  water  transportation 
of  the  Interstate  Commerce  Commission.  This  body 
may  now,  when  reasonably  practicable  and  justifiable, 
establish  physical  connection  between  a  rail  carrier  and 
the  dock  of  a  water  carrier,  by  ordering  one  or  both  to 
lay  connecting  tracks.  It  may  "estabhsh  through 
routes  and  maximum  joint  rates  over  such  lines  and 
determine  terms  and  conditions  under  which  such  lines 
shall  be  operated  in  the  handling  of  the  traffic  em- 
braced." It  may  "establish  maximum  proportional 
rates  by  rail  to  and  from  the  ports  to  which  the  traffic 
is  brought,  or  from  which  it  is  taken  by  the  water  car- 
rier," and  may  "  determine  to  what  traffic  and  in  con- 
nection with  what  vessels  and  upon  what  terms  and 
conditions  such  rates  will  apply." 

iBy  an  act  passed  in  March,  191 1,  codifying   and   amending  the  Federal 
judiciary  system. 


DEVELOPMENT  OF  RATE    REGULATION    217 

The  same  act  provides  that  no  railroad  or  other 
common  carrier  subject  to  the  Interstate  Commerce 
Act  shall  own,  lease,  operate,  control,  or  have  any  in- 
terest in  any  common  carrier  by  water  which  does  or 
may  compete  with  it.  The  question  of  fact,  as  to  the 
existence  or  possibility  of  such  competition,  is  to  be 
decided,  in  each  case,  by  the  Interstate  Commerce 
Commission. 

A  law  passed  in  19 13  provides  for  a  physical  valuation 
of  railroads  in  the  United  States,  to  be  supervised  by  the 
Commission. 

§7 

Summary 

Our  American  form  of  government  makes  necessary 
the  exercise  over  transportation  companies  of  a  twofold 
authority,  that  of  the  states  and  that  of  the  nation. 
The  states  have  jurisdiction  over  intrastate  transporta- 
tion, and  the  Federal  government  has  jurisdiction  over 
interstate  traffic  and  rates.  Both  are  Umited  in  their 
regulating  powers,  by  the  constitutional  prohibition  as 
interpreted  by  the  Supreme  Court,  against  depriving 
persons  of  property  without  due  process  of  law.  The 
states  have,  for  the  most  part,  commissions,  through 
which,  to  a  large  extent,  they  exercise  their  constitutional 
powers  of  control  over  railroads  and  railroad  rates. 
The  Federal  government  exercises  control  through  the 
Interstate  Commerce  Commission.  This  Commission 
has  authority  over  all  important  interstate  carriers  ex- 
cept those  operating  solely  by  water.  Its  authority 
extends  to  their  rates,  classifications,  regulations,  and 
practices.  It  may  suspend  proposed  rate  changes  and 
it  may  determine  when,  and  to  how  great  an  extent,  the 


2i8    TRANSPORTATION  COSTS   OF  COMMERCE 

rule  of  the  long  and  short  haul  clause  may  be  departed 
from.  It  may  estabHsh  through  routes  and  joint  rates. 
Finally,  various  violations  of  the  Interstate  Commerce 
Law,  such  as  the  giving  of  discriminating  rates,  are  sub- 
ject to  criminal  prosecution  by  the  Department  of 
Justice,  and  may  be  punished  by  fine  or  imprisonment 
or  both. 


CHAPTER  IX 

Rulings  of  the  Interstate  Commerce  Commission 
Reasonable  Rates 


Difficulty  of  the  Interstate  Commerce  Commission's  Rate- 
regulating  Problem 

The  task  of  the  Interstate  Commerce  Commission  in 
administering  the  Act  to  Regulate  Commerce  has  been, 
of  necessity,  one  of  great  complexity  and  difficulty. 
Our  study  of  the  expenses  of  railroads  and  the  relation 
of  these  expenses  to  the  volume  of  traffic,  of  the  variety 
of  conditions  to  be  met  in  carrying  difTerent  commodities 
and  serving  different  locaHties,  of  the  distinctions  between 
discriminations  which  are  detrimental  and  those  which 
are  or  may  be  beneficial  to  the  general  economic  welfare, 
has  served  to  emphasize  the  pecuHar  complexity  of  the 
railroad  rate-regulating  problem.  Probably  no  other 
business  does  or  would  present  quite  so  hard  a  problem 
from  the  point  of  view  of  price  or  rate  regulation.  Trol- 
ley companies,  gas  light  companies,  and,  in  general, 
pubHc  service  industries  other  than  railroads  and  some 
water  carriers,  sell  but  a  few  distinguishable  services. 
Their  work  is  comparatively  homogeneous.  To  regulate 
the  rates  charged  for  such  services,  with  due  reference 
to  cost,  is  a  relatively  simple  matter.  Even  the  great 
producing  corporations  which   manufacture   many  by- 

219 


220    TRANSPORTATION   COSTS  OF   COMMERCE 

products  have  far  fewer  by-products  than  the  railroads, 
if  the  term  can  be  stretched  to  cover  the  various  services 
of  freight  and  passenger  transportation. 

Since  the  problem  to  be  dealt  with  is  so  vast  and  diffi- 
cult, it  is  not  to  be  supposed  that  the  Interstate  Com- 
merce Commission  has  made  no  mistakes  in  the  applica- 
tion of  rate  principles  which  are  themselves  correct ; 
nor,  perhaps,  can  we  reasonably  expect  that  the  principles 
laid  down  to  justify  decisions  made,  will,  without  excep- 
tion, withstand  critical  analysis.  But  if,  here  and  there, 
we  find  something  to  criticize,  this  should  not  make  us 
regard  the  entire  policy  of  rate  regulation  as  a  failure  or 
blind  us  to  the  many  benefits  which  regulation  has 
brought.  As  a  whole,  the  work  of  the  Interstate  Com- 
merce Commission  has  been  conscientious  and  efficient ; 
and  there  can  be  Uttle  doubt  that  public  regulation 
of  some  sort,  even  with  its  inevitable  mistakes  and 
shortcomings,  is  preferable  to  irresponsible  corporation 
control. 

Reasonable  Rates  as  Evidenced  by  Comparison 

For  the  most  part,  though  by  no  means  always,  the 
Interstate  Commerce  Commission  has  had  to  deal  with 
individual  rates  or  with  a  few  rates  —  on  specified  goods 
or  between  specified  places  —  rather  than  with  rates  as 
a  whole  throughout  a  wide  territory.  It  has  therefore 
many  times  been  possible,  even  where  discrimination  as 
such  has  not  been  complained  of,  to  test  the  reasonable- 
ness of  a  rate  by  comparison  of  it  with  rates  between 
other  points  or  on  other  goods. 

Thus,  in  an  early  case  involving  rates  on  wheat  from 


RULINGS   AS   TO   REASONABLE   RATES     221 

Walla  Walla  City,  Wash.,  to  Portland,^  Ore,  the  In- 
terstate Commerce  Commission,  in  ordering  a  reduction 
of  rates,  mentioned  as  matters  proper  to  be  taken  into 
consideration  in  judging  of  the  reasonableness  of  a  rate, 
the  rates  charged  for  carrying  the  same  commodity  by 
other  roads  "as  nearly  situated  as  may  be,"  and  the 
diversities  between  the  railroad  in  question  and  the 
roads  with  which  comparison  was  made.  Likewise  in 
the  Cincinnati  Freight  Bureau  case,^  the  Commission 
said :  "Where  the  reasonableness  of  rates  is  in  question, 
comparison  may  be  made,  not  only  with  rates  on  another 
line  of  the  same  carrier,  but  also  with  those  on  the  lines 
of  other  and  distinct  carriers  .  .  .  the  value  of  the 
comparison  being  dependent  in  all  cases  upon  the  degree 
of  similarity  of  circumstances  and  conditions  attending 
the  transportation  for  which  the  rates  compared  are 
charged."  ^  In  another  case,  having  to  do  with  rates  on 
surgical  chairs,^  the  Commission  asserted  that  where 
questions  of  classification  and  rates  are  involved  as  to  a 
particular  article  of  freight,  it  is  often  necessary  to 
examine  the  classification  and  rates  applied  to  other 
articles  similar  in  value,  bulk,  and  expense  of  handling 
and  carriage,  even  though  such  other  articles  are  not 
competitive  with  the  first. 

The  reasonableness  of  a  through  rate  has  more  than 

1  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  325-339.  Decided 
December  3,  18S7. 

*  Interstate  Commerce  Reports,  pp.  195-256.    Decided  May  29,  1894. 

'  Although  it  was  in  connection  with  this  case  that  the  Supreme  Court  handed 
down  its  decision  interpreting  the  original  Interstate  Commerce  Act  as  not 
giving  the  rate-fixing  power  to  the  Commission  (sec  Chapter  VIII,  §  3),  yet 
since  the  amendment  of  1906  gave  this  power,  this  case  and  other  early  cases 
have  importance  as  indicating  the  facts  which  the  Commission  is  likely  to  con- 
sider in  exercising  it. 

*  Interstate  Commerce  Commission  Reports,  Vol.  IV,  pp.  212-227.  Decided 
October  23,  1890. 


2  22    TRANSPORTATION  COSTS  OF  COMMERCE 

once  been  judged  by  comparing  it  with  the  sum  of  two 
or  more  local  rates.     This  standard  was  applied,  for 
instance,   in   the   famous  Alabama   Midland   case.^     A 
part  of  the  complaint  in  that  case  was  that  on  traffic 
from  and  to  the  North  and  East,  the  Alabama  Midland 
railroad  was  charging  a  higher  rate  for  the  shorter  haul 
to  and  from  Troy  than  for  the  longer  haul  westward 
through  Troy  to  Montgomery  and  eastward  from  Mont- 
gomery through  Troy.     But  a  considerable  part  of  the 
complaint,  also,  had  to  do  with  rates  from  Troy  to  New 
Orleans  and  Ohio  River  cities  compared  with  rates  from 
Montgomery,  and  with  rates  from  New  Orleans  and 
Ohio  River  cities  to  Troy  as  compared  with  rates  to 
Montgomery.     The  rates  from  and  to  Troy  were  made 
by  adding  to  the  rates  charged  Montgomery  the  local 
rates  between  Montgomery  and  Troy.     ''The  cost  of 
the  services  in  railway  transportation,"  said  the  Com- 
mission, "is  the  expense  of  the  two  terminals  and  the 
intermediate  haul.     The  terminal  expenses  remain  the 
same  without  reference  to  the  length  of  the  haul.     A 
local  rate  covers  the  expenses  of  both  terminals,  but  a 
division  of  a  through  rate  allotted  to  either  of  the  ter- 
minal carriers  of  the  through  hne  can  only  embrace  the 
expense  of  one  terminal,  and  because  of  this  difference 
in  expense,  among  other  reasons,  local  rates  are  made  as 
a  general  rule  much  higher  in  proportion  to  the  length 
of  haul  than  through  rates  or  any  division  thereof.     A 
local  rate,  which   presumably   is  adopted  as   covering 
both  the  initial  and  final  expenses  of  the  haul  is  prima 

1  Interstate  Commerce  Reports,  Vol.  VI,  pp.  i-3S-  Decided  August  15, 1803. 
The  reader  will  recollect  that,  although  the  Commission  was  overruled  in  this 
case  by  the  Supreme  Court,  the  law  has  since  been  so  amended  as  to  give  the 
former  body  all  the  regulating  power  it  then  claimed.  See  Chapter  VIII,  §§  3 
and  5. 


RULINGS   AS   TO   REASONABLE   RATES      223 

facie  excessive  as  part  of  a  through  rate  over  a  through 
line  composed  of  two  or  more  carriers."  Here  is  clear 
recognition  and  intelligent  application  of  the  fact  that 
terminal  expenses  vary  somewhat  as  the  volume  of 
traflSc,  but  not  at  all  as  the  distance  it  is  carried.^  Yet 
in  the  Savannah  Naval  Stores  case,^  the  Commission 
allowed  the  Louisville  and  Nashville  to  collect,  as  its 
share  of  the  rate  for  carrying  certain  goods  eastward,  an 
amount  equal  to  its  full  local  rate  for  corresponding 
distances  westward.  The  discrimination  complained  of 
was  decreased  in  extent,  it  is  true,  by  the  requirement  of 
a  reduction  in  certain  of  the  rates  charged.  But  the 
Commission  seems,  here,  not  to  have  upheld  consistently 
and  strictly  its  view  that  a  through  rate  which  is  the 
sum  of  local  rates  is  prima  facie  excessive. 

It  must  be  admitted  that  to  judge  of  the  reasonable- 
ness of  rates  by  comparing  them  with  other  rates,  is  to 
apply  a  standard  which  may  itself  be  far  from  the  ideal. 
The  rates  with  which  comparison  is  made  may  them- 
selves require  readjustment.  Yet,  though  not  altogether 
satisfactory  as  an  ultimate  test,  the  method  of  compari- 
son may  have  value  as  supplementary  evidence,  and  as 
establishing  a  presumption  that  rates  are  or  are  not 
reasonable.  Furthermore,  the  practical  difficulties  in 
the  way  of  accurately  applying  a  more  fundamental  test, 
or  tests,  are  often  very  great .  As  we  have  already  noted,^ 
many  of  the  expenses  of  a  railroad  are  joint  expenses 
which  cannot  be  definitely  allocated  to  different  parts 
of  the  business  done.  Different  transportation  services 
must  usually  contribute  in  different  proportions  towards 

*  Cf.  Chapter  I,  §§  2  and  3. 

*  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  377-408.  Decided  January  8, 
1900.  » Chapter  I,  §  2. 


2  24    TRANSPORTATION  COSTS  OF  COMMERCE 

these  joint  expenses.  But  In  what  proportions  ?  The 
determination  of  this  problem,  even  if  all  the  data  as  to 
special  costs  and  joint  costs  are  at  hand,  is  hkely  to  be 
a  most  difficult  one.  Even  constant  experiment  by  no 
means  always  determines  it  correctly.  What  more 
natural,  then,  than  for  the  Interstate  Commerce  Com- 
mission to  seek  to  compare  rates  complained  of  as  un- 
reasonable, with  rates  for  somewhat  similar  transporta- 
tion services  on  the  same  or  other  roads,  rates  often 
voluntarily  established  by  the  carrier  or  carriers  con- 
cerned, and  as  to  which  there  is  so  much  presumption  of 
their  reasonableness  as  is  afforded  by  their  not  being 
matters  of  complaint? 

§3 
Reasonable  Rates  as  Tested  by  Cost  of  Service 

Cost  of  service,  whether  in  the  case  of  transporting 
particular  goods,  of  transportation  between  particular 
places,  or  of  transportation  in  general  on  a  particular 
railroad  or  through  a  given  territory,  has  many  times 
been  the  determining  consideration  in  the  Commission's 
ruhngs  as  to  rate  reasonableness.  In  a  complaint 
brought  by  the  Delaware  State  Grange,  concerning  high 
rates  on  specified  perishable  truck-farm  products,  the 
Commission,  though  ordering  certain  reductions,  pointed 
out  that  for  such  a  special  service  as  the  transportation 
of  perishable  freight,  requiring  quick  movement,  prompt 
dehvery,  special  fitting  up  of  cars,  and  return  of  cars 
empty  in  fast  time,  higher  rates  than  on  ordinary  trafl&c 
were  justifiable.  In  other  words,  the  rate  might  be 
higher  to  compensate  for  higher  expense. 

A  complaint  directed  against  the  Western  New  York 


RULINGS   AS   TO  REASONABLE   RATES      225 

and  Pennsylvania  Railroad,  shortly  after  the  passage  of 
the  original  Interstate  Commerce  Law,  by  Rice,  Robin- 
son, and  Witherop,  had  to  do  with  the  reasonableness  of 
the  rates  charged  by  that  road  for  the  transportation  of 
oil  from  Titusville,  Va.,  to  Buffalo,  N.  Y.  The  Inter- 
state Commerce  Commission  dismissed  the  case  chiefly 
on  the  ground  that  the  transportation  was  on  a  short 
local  line,  having  only  a  small  volume  of  business,  and 
having,  for  this  reason  as  well  as  because  of  steep  grades, 
a  high  average  cost  of  service. 

Again,  in  the  Cincinnati  Freight  Bureau  case,^  when 
deciding  on  maximum  rates  ^  for  the  transportation  of 
manufactured  goods  from  Cincinnati  and  Chicago  to 
southern  points,  the  Commission  gave  consideration  to 
the  greater  average  cost  of  transportation  on  southern 
roads  than  on  railroads  north  of  the  Ohio  River.  "The 
cost  on  freight  in  general  per  ton  per  mile  on  the  roads 
south  of  the  river,"  it  was  said,  "appears  to  have  been 
.  .  .  about  25  per  cent,  on  an  average  greater  than  the 
cost  per  ton  per  mile  on  the  roads  from  Chicago  to  the 
river.  The  tonnage  of  the  latter  roads  is  also  greater 
than  that  of  the  former  as  shown  in  the  tables.  Rates 
from  Cincinnati  to  Southern  territory  from  35  to  50  per 
cent,  higher  per  ton  per  mile  than  those  from  Chicago 
to  Cincinnati  and  other  Ohio  river  crossings  will,  in  our 
opinion,  make  full  allowance  for  these  differences  in 
cost  and  tonnage,  and  be  at  least  not  unreasonably  low 
as  maximum  rates."  The  Commission  has  also  recog- 
nized that  rates  may  properly  be  exceptionally  low,  if 
no  loss  is  involved,  to  induce  the  movement  of  traffic 

1  Interstate  Commerce  Reports,  Vol.  VI,  pp.  195-256.   Decided  May  2q,  180.4. 
«  Which  rates,  in  the  then  state  of  the  law  as  interpreted  by  the  Suprcnu 
Court,  were  not  enforceable.     See  Chapter  VIII,  §  3. 
Q 


226    TRANSPORTATION  COSTS  OF  COMMERCE 

in  a  direction  in  which  there  is  a  considerable  movement 
of  empty  cars.^ 

§4 

Earnings  as  a  Test  of  Reasonableness 

In  a  number  of  cases,  the  Commission  has  laid  em- 
phasis, in  reaching  its  decisions,  on  the  earnings  of  rail- 
roads. In  the  Danville,  Va.,  case,^  they  defended  (in 
part)  an  order  the  enforcement  of  which  would  have 
compelled  the  Southern  Railway  to  reduce  very  con- 
siderably the  rates  charged  on  traffic  to  and  from  Dan- 
ville, by  arguing  that  such  reduced  rates  would  be  Hkely 
to  increase  the  business  done  at  Danville  and,  therefore, 
the  traffic  of  the  railroad,  and  that  the  loss  from  reduc- 
tion would,  in  consequence,  not  be  important.  They 
even  suggested  that  the  order  made  might  later  be  modi- 
fied in  favor  of  the  company  in  case  the  adverse  effects 
upon  earnings  proved  more  serious  than  was  expected. 

But  it  frequently  happens  that  a  rate  complained  of 
concerns  two  or  more  different  railroads  which  are  rivals 
for  the  traffic  in  question.  Under  such  circumstances 
shall  the  earnings  of  one  or  another  or  of  all  the  roads  be 
considered  in  arriving  at  a  decision  as  to  the  reasonable- 
ness of  rates  charged  ?  This  question  came  before  the 
Interstate  Commerce  Commission  in  the  Spokane  case,^ 
shortly  after  the  passage  of  the  Hepburn  Amendment  of 
1906,  and  again  in  the  case  of  the  Receivers  and  Shippers 
Association  of  Cincinnati  v.  Cincinnati,  New  Orleans  6* 

» Interstate  Commerce  Reports,  Vol.  VI,  pp.  61-84.     Decided  October  20, 

1893. 

^Ibid.,  Vol.  VIII,  pp.  409-442  and  571-584-  Decided  February  17  and 
November  17,  1900. 

'Interstate  Commerce  Commission  Reports,  Vol.  XV,  pp.  376-426.  De- 
cided February  9,  1909. 


RULINGS   AS   TO  REASONABLE   RATES     227 

Texas  Pacific  Railway  Company}  In  the  former  case 
the  complaint  related  to  rates  from  St.  Paul,  Minn.,  and 
Chicago,  111.,  to  Spokane,  Wash.,  which  were  alleged 
to  be  not  only  discriminatory  against  Spokane  as  com- 
pared with  coast  points,  but  also  unduly  high.  The 
Commission,  which  had  now  the  power  to  fix  maximum 
rates,  established  such  rates  for  traffic  from  St.  Paul 
and  Chicago  to  Spokane.  But  the  Commission  took 
occasion  to  lay  down  the  principle  that  in  determining 
what  rates  are  reasonable  between  two  given  points, 
neither  the  railroad  which  can  carry  goods  at  the  lowest 
rate  nor  the  road  whose  necessities  might  justify  a 
higher  rate  should  alone  be  considered.  Rates  must  be 
fixed  with  reference  to  the  entire  situation.  "The  city 
of  Spokane  could  not  develop  if  served  by  the  Great 
Northern  Railway  alone ;  nor  can  we  look  wholly  to  the 
interest  of  Spokane.  The  whole  territory  served  by 
these  defendant  lines  must  be  considered  and  the  exist- 
ence of  all  those  railroads  to  that  territory  is  absolutely 
essential.  These  railroads  cannot  exist  unless  rates  are 
established  which  will  yield  a  fair  return  upon  their 
property." 

In  the  Cincinnati  case,  the  Receivers  and  Shippers 
Association  of  Cincinnati  complained  of  the  unreason- 
ableness of  the  rates  charged  on  traffic  from  Cincinnati, 
Ohio,  to  Chattanooga,  Tenn.,  and  demanded  a  substan- 
tial reduction.  It  was  shown  that  the  profits  of  the  most 
direct  and  favorably  situated  line,  the  Cincinnati,  New 
Orleans,  and  Texas  Pacific  Railway,  were  large,  and  that 
it  could  well  afford  to  make  the  reduction  sought  for. 
But  traffic  between  Cincinnati  and  Chattanooga  was 
9,lso  carried  over  the  Louisville  and  Nashville  Railroad 

^Ibid.,    Vol.  XVIII,  pp.  44o-.i77-     Decided  February  17,  1910. 


228     TRANSPORTATION   COSTS   OF  COMMERCE 

and  its  connecting  line,  the  Nashville,  Chattanooga, 
and  St.  Louis.  These  lines,  though  solvent,  did  not 
appear  to  be  nearly  so  prosperous.  The  Commission 
again  contended  that  the  interests  of  all  lines  should  be 
considered  and  not  merely  the  interest  of  the  line  which 
could  take  the  traffic  most  cheaply.  Although  a  reduc- 
tion was  ordered,  this  reduction  was  too  inadequate  to 
satisfy  the  Shippers  Association  and  that  body  made  an 
unsuccessful  appeal  to  the  Commerce  Court  on  the  curi- 
ous ground  that  the  Commission,  by  establishing  such 
high  rates  —  which  were  maxima  and  not  minima  — 
was  depriving  shippers  of  property  without  due  process 
of  law. 

Our  interest  is  with  the  economic  justification  for 
considering  the  earnings  of  all  the  lines  concerned  rather 
than  the  earnings  of  the  direct  and  favorably  situated 
line  only.  Should  a  railroad  which  can  afford  to  carry 
goods  between  two  points,  e.g.  Cincinnati  and  Chat- 
tanooga, at  low  rates,  be  allowed  to  charge  high  rates 
and  enjoy  a  per  cent,  profit  much  above  the  average,  in 
order  that  another  road  —  more  roundabout  or  other- 
wise less  efficient  for  the  business  in  question  —  may  also 
secure  profits  from  such  business  in  excess  of  cost  of 
operation?  In  the  absence  of  special  circumstances,  it 
would  seem  that  two  communities  were  entitled  to  a 
transportation  rate  between  them,  which  would  yield 
fair  profits  to  a  railroad  as  advantageously  located  as 
could  be  expected  from  average  managerial  and  engineer- 
ing ability  and  that  a  higher  rate  would  be  unreasonable. 
A  higher  rate  would  involve  an  unjust  distribution  of 
wealth ;  also  it  would  tend  to  prevent  commerce  which 
was  worth  its  cost  and  ought  to  take  place.^    If  a  rail- 

1  Cf.  Chapter  I,  §  8,  and  Chapter  II,  §  6. 


RULINGS   AS   TO   REASONABLE   RATES         229 

road  connecting  the  same  two  places  by  another  route 
could  not  afford  to  charge  equally  low  rates  and  could 
not  get  enough  profitable  intermediate  traffic  to  make  it 
a  paying  proposition,  it  ought  not  to  be  built.  Two 
trade  centers,  e.g.  Cincinnati  and  Chattanooga,  ought 
not  to  have  to  pay  rates  above  reasonable  cost  and  profits 
by  the  cheapest  practicable  route,  and  so  have  their 
industrial  and  commercial  development  retarded,  in 
order  to  make  possible  the  construction  of  another  line 
to  run  through  and  serve  various  local  points.  Thus  to 
make  some  communities  contribute  to  the  welfare  of 
others  is  to  discourage  industry  in  the  former  and  en- 
courage it  in  the  latter ;  it  is  to  interfere  uneconomically 
with  the  location  of  industry.  If  the  most  economical 
railroad  could  not  carry  all  the  traffic,  additional  track- 
age should  be  constructed  sufficient  for  the  end  in  view, 
unless  another  and,  perhaps,  a  more  roundabout  rail- 
road could  take  so  much  local  traffic  as  to  enable  it  to 
carry  the  longer  distance  traffic  just  as  cheaply  as  the 
more  direct  line.^ 

The  qualifications  which  must  be  made  to  this  prin- 
ciple would  appear  to  be  of  minor  importance.  It  will 
sometimes  be  the  case  that  the  entire  traffic  between  two 
given  points  cannot  be  carried  by  the  most  direct  hne 
unless  it  increases  the  size  of  its  plant,  e.g.  unless  it  lays 
an  additional  track,  buys  more  cars  and  engines,  etc. 
Yet  the  additional  traffic  so  securable  may  not  be 
enough  fully  to  utilize  the  new  facilities.  Rates  which 
yielded  an  adequate  return  on  the  smaller  and  fully 
utilized  plant  may  not  be  quite  high  enough  to  yield 
correspondingly  adequate  returns  on  the  larger  plant. 
Rates  which  would  justify  such  additional  construction 

1  Cf.  Chapter  II,  §  2,  and  Chapter  V,  §  i. 


230     TRANSPORTATION   COSTS  OF   COMMERCE 

would,  of  course,  be  more  remunerative  to  rival  lines  less 
advantageously  situated  than  lower  rates  would  be. 
By  carrying  some  of  the  longer  distance  traffic  at  rates 
no  higher  than  these,  they  might  obviate  the  necessity 
of  additional  trackage  by  the  most  direct  Hne,  to  the 
general  advantage  of  the  community.  Such  possibilities 
ought,  perhaps,  to  be  considered  in  fixing  maximum 
rates,  but  to  say  this  is  hardly  the  same  thing  as  to  say 
that  rates  between  two  points  ought  to  be  fixed  with 
reference  to  the  earnings  of  railroads  having  the  longest 
and  most  expensive  as  well  as  those  having  the  cheapest 
routes. 

Again,  it  may  conceivably  happen  that  the  cheapest 
possible  route  runs  along  a  river  bank,  or  through  gorges, 
and  that  available  space  is  so  Hmited  as  not  to  allow  of 
sufficient  tracks,  on  this  route,  to  provide  for  all  the 
traffic  between  the  points  in  question.  Under  such  cir- 
cumstances, which  are,  in  a  high  degree,  special,  the 
rates  allowed  probably  ought  to  be  high  enough  to  yield 
ordinary  profits  by  one  or  more  other  fines,  since  such 
other  lines  are  necessary  for  the  transportation  of  goods 
between  the  points  in  question  and  should  not  be  ex- 
pected to  give  those  places  special  rates  at  the  expense 
of  intermediate  towns.  The  more  favorably  situated 
railroad  enjoys  a  surplus  which  is,  economically,  situa- 
tion rent. 

It  may  be  desirable,  then,  in  judging  of  the  reason- 
ableness of  rates  between  two  given  places,  to  consider 
"the  whole  situation"  as  the  Commission  has  said  that 
it  will  do.  But  in  the  absence  of  such  special  circum- 
stances as  those  above  alluded  to,  emphasis  should  be 
put  chiefly  on  the  earnings  of  the  railroad  which  can  do 
the  work  most  cheaply.     Rates  should  be  so  fixed  as  to 


RULINGS   AS  TO  REASONABLE   RATES         231 

give  such  a  road  average  returns,  unless  the  selection  of 
its  route  required  exceptional  foresight  and  ability,  in 
which  case  returns  somewhat  above  the  average  are 
fairly  earned. 

In  this  same  case,  i.e.  that  of  the  Receivers  and  Ship- 
pers Association  of  Cincinnati  v.  Cincinnati,  New 
Orleans  b"  Texas  Pacific  Railway  Company,  the  Com- 
mission contended  that  "the  main  line  should  in  a 
degree  contribute  to  the  support  of  the  branch  line,  for 
the  branch-line  business  when  it  reaches  the  main  Hne  is 
surplus  traffic,  from  which  a  larger  profit  is  made.  .  .  . 
It  hardly  seems  proper  to  fijc  the  rates  upon  the  Cincin- 
nati Southern  [the  line  leading  from  Cincinnati  to  Chat- 
tanooga, operated  by  the  Cincinnati,  New  Orleans  & 
Texas  Pacific  Railway  Company],  which  is  really  a  main 
line,  without  any  reference  to  the  branch  lines  which 
contribute  to  it."  This  view  can  hardly  be  defended. 
In  the  first  place,  the  branch-line  business,  when  it  reaches 
the  main  line,  is  no  more  "surplus"  traffic  than  local 
business  may  be.  If  the  road  was  built  primarily  for 
the  through  traffic,  it  would  even  seem  more  fitting  to 
speak  of  the  local  traffic  as  surplus.  Where  roads  con- 
nect and  make  joint  rates,  it  is  proper  that  each  should 
receive  a  share  of  such  rates  based  on  its  conditions  of 
operating  cost,  volume  of  traffic,  etc.,  but  this  does  not 
mean  that  one  line  "contributes"  out  of  surplus  revenues 
towards  the  earnings  of  another.  A  branch  line  is 
sometimes  spoken  of  as  yielding  no  profits  directly,  but 
as  being  valuable  to  a  main  hne  as  a  feeder.  When  the 
main  line  owns  the  branch  hne  it  is  a  mere  matter  of 
accounting  convenience  or  even  accident,  how  large  a 
share  of  a  through  rate  is  assigned  to  each  part.  An 
important  feeder  may  thus  be  made  to  appear  altogether 


232    TRANSPORTATION  COSTS  OF  COMMERCE 

unprofitable  of  itself.  But  if  it  were  a  separate  com- 
pany, separately  operated,  and  turning  over  large  and 
profitable  traffic  to  a  main  line,  it  ought  to  have  a  suffi- 
ciently large  share  of  the  rate  to  give  it,  with  good 
management,  a  reasonable  return.  If  it  is  really  worth 
while  as  a  feeder,  it  ought  to  be  able  to  exist  under 
separate  management  as  well  as  under  control  of  the 
main  hne.  In  fixing  a  through  rate,  it  is  of  course  only 
fair  that  both  branch  and  main  Hne  should  be  con- 
sidered to  the  extent  of  not  making  the  rate  so  low  as  to 
be,  if  properly  divided,  unremunerative  to  either;  but 
there  is  no  excuse  for  allowing  exorbitant  main-Une  rates 
—  as  the  Commission  itself  would  doubtless  declare, 
were  the  question  clearly  presented  —  merely  because 
one  or  more  branch  lines  or  feeders  are  earning  only 
average  or  small  returns. 

The  Rate  Advances  cases  of  1910  and  19 14  turned 
very  largely  on  the  question  of  sufficiency  of  earnings. 
In  1910  the  railroads  in  Official  Classification  Territory,^ 
and  in  Western  Trunk  Line,  Trans-Missouri,  and  Illinois 
Freight  Committee  territories  filed  important  freight 
advances  which  the  Interstate  Commerce  Commission, 
under  the  power  given  it  by  the  Amendment  of  1910  to 
the  Interstate  Commerce  Act,  suspended  temporarily 
pending  investigation.^  The  railroads  had  no  difficulty 
in  establishing  the  fact  that  expenses,  both  the  money 
prices  of  materials  and  the  money  wages  of  labor,  had 
risen ;  but  it  appeared  that  their  traffic  also  had  in- 
creased greatly,  so  that  their  earnings  during  the  im- 
mediately preceding  fiscal  year  had  been  more  satis- 

1  Lines  east  of  Chicago  and  the  Mississippi  River  and  north  of  the  Ohio  and 
Potomac  rivers. 

*  See  Interstate  Commerce  Commission  Reports,  Vol.  XX,  pp.  243-306 
(eastern  roads),  and  pp.  307-309  (western  roads).     Decided  February  22,  ign. 


RULINGS   AS   TO   REASONABLE  RATES        233 

factory,  perhaps,  than  ever  before.  Some  attempt  was 
made  to  show  that,  during  the  few  months  after  the 
close  of  the  fiscal  year,  conditions  had  been  less  favor- 
able to  the  railroads.  On  the  whole,  however,  the 
Commission  was  not  convinced  that  earnings  were  in- 
adequate and  it  therefore  required  the  new  rates  to  be 
withdrawn. 

In  19 14,  the  railroads  in  Official  Classification  Terri- 
tory, in  the  so-called  Five  Per  Cent,  case,^  again  sought 
permission  to  increase  their  charges.  They  contended 
that  the  rate  of  return  on  capital  invested  was  declining, 
that  this  was  due  to  increased  expenses  of  operation,  and 
that  it  tended  seriously  to  injure  the  credit  of  the  rail- 
way companies.  The  Commission  was  considerably  im- 
pressed with  the  deficiency  of  revenue,  but  beUeved  that 
it  was  due,  in  part,  to  the  fact  that  many  special  services 
were  being  rendered  to  shippers  with  no  charge  or  an 
inadequate  charge,  and  in  part  to  the  fact  that  certain 
rates  were  unremunerative.  A  general  rate  advance, 
they  believed  to  be  a  relatively  undesirable  method  of 
restoring  revenues  to  a  proper  basis.  They  permitted, 
however,  many  of  the  advances  desired  in  Central 
Traffic  Association  Territory,  i.e.  in  that  part  of  Official 
Classification  Territory  lying  west  of  Buffalo  and  Pitts- 
burg. 

The  outbreak  of  the  European  war  tended,  by  diminish- 
ing traffic,  still  further  to  reduce  net  revenues,  and  the 
Commission  was  induced  to  give  the  appeal  for  higher 
rates  a  rehearing.-  Extension  of  the  increased  rate, 
over  the  rest  of  Official  Classification  Territory,  was 
permitted. 

» Ibid.,  Vol.  XXXI,  pp.  3SI-4S4-    Decided  July  29,  1914. 
'Ibid.,  Vol.  XXXII,  pp.  325-354-    Decided  December  16,  1914. 


234     TRANSPORTATION   COSTS  OF   COMMERCE 

§  5 

Reasonable  Rates  in  Relation  to  the  Fair  Value  of  Railroad 

Property 

To  say  that  transportation  rates  should  yield  adequate 
revenues  is  to  say  that  the  revenues  yielded  should  bear 
a  proper  relation  to  the  fair  value  of  the  property.  This 
is  to  make  the  rates  required  depend,  in  large  part,  on 
the  value  attributed  to  the  railroad. 

But  how  is  this  value  to  be  determined?  In  Grain 
Shippers'  Association  of  Northwest  Iowa  v.  Illinois  Cen- 
tral Railroad  Company  et  al.,^  involving  rates  for  the 
transportation  of  grain  eastward  from  northwest  Iowa, 
the  matter  of  capitalization  was  raised  by  the  defense, 
among  other  arguments,  as  a  reason  why  rates  should 
not  be  reduced.  The  Commission  said,  however,  that 
if  the  capitalization  of  a  railroad  was  to  have  considera- 
tion in  cases  involving  rate  readjustment,  the  statement 
of  it  should  be  accompanied  by  a  history  of  the  capital 
account,  by  a  showing  as  to  the  value  of  the  stock  and 
other  securities,  and  by  a  statement  of  the  actual  cost 
and  value  of  the  property  itself.  They  went  farther 
than  this,  in  fact,  and  asserted  that  to  make  the  capital 
account  of  railroads  a  standard  of  legitimate  earnings 
(and,  therefore,  a  standard  by  which  to  fix  rates)  would 
place  at  great  disadvantage  the  company  which  had 
been  honestly  managed  from  the  start.  The  thought  is, 
obviously,  that  such  a  test  would  give  grounds  for  the 
overcapitalized  road  to  seek  higher  rates,  in  order  to 
earn  dividends  on  such  excess  capital,  than  were  charged 
by   the   other   railroads;     whereas   the   conservatively 

1  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  154-184-     Date  of  decision 
not  given,  but  was  apparently  early  in  1899. 


RULINGS   AS   TO   REASONABLE   RATES        235 

managed  company  would  be  refused  such  permission. 
The  history  of  the  capital  account,  however,  would  show 
whether  securities  issued  had  always  been  based  on 
actual  investment ;  the  market  value  of  securities, 
though  not  at  all  a  satisfactory  test  of  rates,  since  such 
market  value  itself  depends  largely  on  the  rates,  may 
have  some  independent  value,  for  market  value  of  securi- 
ties depends  partly  on  sustained  good  management, 
including  the  element  of  good  will.  The  actual  cost  of 
the  property  would  mean  original  investment,  on  which, 
under  average  circumstances,  the  railroad  might  fairly 
expect  reasonable  return ;  and  the  value  of  the  property 
—  in  the  sense  of  physical  value  —  would  probably  be  a 
better  standard,  taken  by  itself,  than  any  other.  But 
each  standard,  aside  from  its  independent  significance, 
may  have  a  bearing  upon  the  correctness  of  the  other 
standards.  For  example,  the  history  of  the  capital 
account  and  the  market  value  of  the  securities  of  a  rail- 
road may  sometimes  serve  to  confirm  a  conclusion  inde- 
pendently reached  regarding  the  value  of  its  plant. 

A  similar  attitude  was  taken  by  the  Commission,  in 
1900,  in  the  Danville,  Va.,  case,^  when  it  was  urged  by 
the  Southern  Railway  Company,  that  no  order  could 
properly  be  made  reducing  rates  to  and  from  Danville, 
which  would  have  the  effect  of  decreasing  the  railroad's 
revenues,  since  in  1899  it  had  earned  nothing  upon 
$1 20,000,000  of  common  stock.  The  Commission  replied 
that  this  common  stock  "was  issued  as  a  part  of  a  re- 
organization scheme  under  which  the  Southern  Railway 
Company  came  into  existence.  It  does  not  appear  that 
the  persons  to  whom  this  stock  was  originally  issued  ever 

^  Ibid.,  Vol.  VIII,  pp.  409-442  and  571-584.  Decided  February  17  and 
November  17,  1900. 


236     TR.\NSPORTATION   COSTS   OF   COMMERCE 

paid  one  dollar  in  actual  value  for  it.  It  simply  appears 
that  the  stock  is  outstanding.  This  is  not  enough. 
Something  more  is  needed  when  a  claim  of  this  kind  is 
set  up  than  the  mere  fact  of  the  existence  and  amount  of 
capitalization.  It  does  not  rest  in  the  whim  of  a  re- 
organization committee  in  Wall  Street  to  impose  a 
perpetual  tax  upon  that  whole  southern  country." 

In  the  same  case  and  the  same  connection,  the  Com- 
mission seems  to  place  emphasis  upon  the  physical  value 
of  the  plant  as  a  criterion  of  fair  value  and  a  test  of  rates. 
They  continue:  "In  the  year  1899  the  Southern  Rail- 
way earned  net  about  4  per  cent,  on  $40,000  a  mile  of 
the  mileage  of  its  entire  system.  That  system  extends, 
as  a  rule,  through  sparsely  populated  territories,  no 
difficult  and  expensive  engineering  feats  were  involved 
in  its  construction,  nor  has  it  in  proportion  to  its  extent 
many  expensive  terminals.  It  will  hardly  be  claimed 
that  the  cost  of  reproducing  that  property  in  its  present 
state  would  equal  $40,000  a  mile."  Perhaps  the  show- 
ing made  by  the  railway  company  in  this  case  would 
have  been  sufficient  to  prevent  the  issuance  of  an  order 
for  a  general  reduction  of  rates  throughout  its  territory, 
had  such  a  question  been  before  the  Commission.  But 
it  was  not  deemed  a  sufficient  reason  why  rates  to  and 
from  Danville,  which  was  admittedly  discriminated 
against,  should  not  be  reduced. 

That  the  Commission  regards  the  physical  value  of  the 
plant  as  an  important,  if  not  the  most  important,  stand- 
ard by  which  to  judge  general  rate  reasonableness,  is 
evidenced  by  the  discussion,  in  the  Twenty-third  Annual 
Report  of  the  Interstate  Commerce  Commission,^  of 
the  necessity  for  a  physical  valuation  of  all  railroads. 

ip.  6. 


RULINGS   AS   TO   REASONABLE   RATES        237 

"There  is,"  the  Commission  said,  "in  our  opinion,  urgent 
need  of  a  physical  valuation  of  the  interstate  railways  of 
this  country.  .  .  .  Even  assuming  that  the  valuation 
of  our  railways  would  be  of  no  assistance  to  the  Com- 
mission in  establishing  reasonable  rates,  it  is  still  neces- 
sary, if  those  rates  are  to  be  successfully  defended  when 
attacked  by  the  carriers,  that  some  means  be  furnished 
by  which,  within  reasonable  limits,  a  value  can  be 
estabhshed  which  shall  be  binding  upon  the  courts  and 
the  Commission." 

In  deciding,  in  191 1,  the  question  of  rate  advance  by 
eastern  roads, ^  the  Commission  again  discussed  the 
various  methods  of  determining  the  correct  value  on 
which  earnings  ought  to  be  allowed.  "Were  it  possible 
to  determine,"  they  said,  speaking  of  original  invest- 
ment, "the  exact  amount  of  money  which  has  been  put 
into  these  properties,  the  amount  of  return  which  has 
been  paid  up  to  the  present  time,  the  degree  of  prudence 
with  which  the  property  has  been  constructed  and 
operated,  certainly  the  investment  would  furnish  a  very 
satisfactory  basis  for  arriving  at  an  equitable  return. 
But  these  facts  never  can  be  determined  with  accuracy." 
The  market  value  of  securities,  the  Commission  thought, 
ought  to  have  some  significance,  for  two  reasons.  In 
the  first  place,  this  market  value  did,  indeed,  depend 
upon  the  rates  which  had  been  charged,  but  those  rates 
had  been  determined,  in  the  past,  largely  by  competition, 
so  that,  on  the  average,  they  were  perhaps  not  above 
the  level  of  reasonableness.  In  a  proceeding  brought  to 
secure  permission  for  charging  higher  rates,  the  fact 
that  existing  rates  yielded,  for  many  railroads,  fairly 

'  Interstate  Commerce  Commission  Reports,  Vol.  XX,  pp.  243-306.  Decided 
February  22,  igii. 


238     TRANSPORTATION   COSTS   OF   COMMERCE 

good  returns  on  the  market  value  of  their  securities 
might  be  a  reason  for  opposing  higher  rates.  In  the 
second  place,  whether  past  rates  had  or  had  not  been 
reasonable,  they  had  been  permitted,  and  the  value  of 
securities  had  been  determined  on  the  basis  of  the 
height  of  those  rates.  These  securities  had  been  bought 
and  sold,  and  were  held  by  persons  who  had  invested  in 
them  on  this  basis.  Hence,  it  was  proper  that  some  re- 
gard should  be  paid  to  the  question,  whether  future 
rates  would  earn  an  average  per  cent,  profit  on  the  market 
value  of  such  securities.  Undoubtedly  it  is  proper  that 
such  facts  should  be  given  some  consideration.  But 
that  does  not  mean,  and  it  is  not  probable  that  the  Com- 
mission understood  it  to  mean,  that  the  pubUc,  if  it  has, 
for  a  time,  allowed  rates  which  yielded  a  surplus  above 
fair  profits,  must  continue  so  to  sacrifice  through  all 
future  time,  in  order  to  preserve  so-called  vested  rights. 
It  is  well  enough  to  "make  haste  slowly,"  but  investors 
must  nevertheless  be  held  to  have  taken  the  risk  of 
change,  knowing  that  the  pubHc  has  the  right  to  regulate 
when  public  welfare  demands,  and  may  exercise  that 
right  by  reducing  rates.  To  take  a  contrary  attitude 
would  be  to  say  that  the  pubHc  can  never  pass  a  new 
law  which  affects  any  person's  finances  unfavorably, 
or  levy  any  new  tax,  without  compensating  the  persons 
unfavorably  affected.  The  Commission  spoke  of  cost 
of  reproduction  as  "perhaps  the  most  important"  of 
the  various  standards  discussed,  but  was  unable  to  apply 
it  because  no  physical  valuation  of  the  railroads  had 
been  made.  Yet  in  discussing  the  case  of  the  western 
roads, ^   the   Commission   says:    "Perhaps   the  nearest 

1  Interstate  Commerce  Commission  Reports,  Vol.  XX,  pp.  307-399-     Decided 
February  22,  191 1, 


RULINGS   AS   TO   REASONABLE   RATES        239 

approximation  to  the  fair  standard  is  that  of  bona  fide 
investment  —  the  sacrifice  made  by  the  owners  of  the 
property  —  considering  as  part  of  the  investment  any 
shortage  of  return  that  there  may  be  in  the  early  years 
of  the  enterprise.  Upon  this,  taking  the  hfe  history  of 
the  road  through  a  number  of  years,  its  promoters  are 
entitled  to  a  reasonable  return."  But  the  Commission 
continues:  "This,  however,  manifestly  is  limited;  for 
a  return  should  not  be  given  upon  wastefulness,  mis- 
management, or  poor  judgment,  and  always  there  is 
present  the  restriction  that  no  more  than  a  reasonable 
rate  may  be  charged."  It  appears,  therefore,  that  the 
Commission  could  not  favor  allowing  profits  to  be  earned, 
on  the  full  cost  of  a  wastefuUy  built  railroad  or  of  a  rail- 
road built,  because  of  poor  judgment,  along  an  un- 
economical route.  The  original  cost  of  investment,  as 
a  standard,  is  so  qualified  as  to  suggest  present  cost  of 
reproduction,  along  the  best  practicably  available  routes, 
of  the  railroads  required. 

In  presenting  the  case  for  higher  rates,  the  Chicago, 
Burlington  and  Quincy  Railroad,  in  particular,  laid 
emphasis  upon  the  view  that  rates  should  yield  a  profit 
on  the  total  value  of  the  railroad  property,  including 
the  present  value  of  the  land  used  for  terminals  and 
right  of  way.  The  Commission  thought  that  the  rail- 
road's gain  from  increased  value  of  its  real  estate  should 
come  by  means  of  larger  trafiic  rather  than  higher  rates, 
that  higher  rates  could  not  be  justified  merely  by  prov- 
ing higher  value  of  land,  and  that  existing  rates  were 
sufficient  to  give  fair  returns  on  the  full  value  of  the  land 
space  used.  The  Commission  at  least  did  not  deny  that 
a  wisely  located  and  efiiciently  managed  railroad  should 
be  allowed  to  earn,  besides  fair  return  on  cost  of  build- 


240     TRANSPORTATION   COSTS  OF   COMMERCE 

ing,  as  much  as  the  land  used  would  yield  in  other  busi- 
ness.^ Any  other  principle  would  be  discriminating 
against  the  railroad  business  as  compared  to  other  kinds 
of  business. 

§6 

Efficiency  of  Management  in  Relation  to  Reasonable 
Rates 

Attention  has  already  ^  been  given  to  the  view  of  the 
Interstate  Commerce  Commission  that  a  return  "should 
not  be  given  upon  wastefulness,  mismanagement,  or  poor 
judgment."  In  connection  with  the  discussion  of  the 
same  case,  the  Commission  emphasized  its  beUef  that 
"some  method  must  be  found  under  which  a  carrier  by 
its  own  efficiency  of  management  shall  profit.  A  pre- 
mium must  be  put  upon  efficiency  in  the  operation  of  the 
American  railroad."  And  the  way  in  which  this  could 
be  done,  in  the  judgment  of  the  Commission,  was  by  not 
allowing  rates  to  be  increased  merely  because  manage- 
ment was  wasteful,  corrupt,  or  indifferent,  nor  yet  in- 
sisting that  they  be  decreased  where  management  was 
exceptionally  wise  and  skillful,  but  by  allowing  the 
security  holders  of  the  railroads  to  reap  larger  or  smaller 
returns  according  to  the  honesty  and  efficiency  with 
which  their  corporations  were  managed.  In  consider- 
ing the  case  of  the  poorer  roads  in  Western  Territory, 
the  Commission  again  emphasized  this  view,  saying: 
"It  is  almost  axiomatic  that  rates  cannot  be  made  so  as 
to  give  high  earnings  to  a  poorly  placed,  indifferently 

» Assuming,  of  course,  that  transportation  facilities  could  be  had  for  the 
products  of  such  business.  All  of  the  railroad  land  should  be  valued  by  reckoning 
from  the  worth  of  a  marginal  increment  of  such  land. 

»  §  5  of  this  Chapter  (IX). 


RULINGS   AS   TO   REASONABLE   RATES        241 

operated,  or  isolated  road  without  making  the  rates 
absolutely  extortionate."  And  again,  in  the  Five  Per 
Cent,  case,^  the  Commission  said  :  "No  one  could  reason- 
ably contend  that  the  public  should  pay  higher  trans- 
portation rates  because  once  prosperous  properties  — 
like  the  New  Haven,  the  Chicago  &  Eastern  Illinois,  the 
Alton,  the  Frisco,  or  the  Cincinnati,  Hamilton  &  Dayton 
—  may  now  be  in  need  of  additional  funds  as  a  conse- 
quence of  mismanagement.  Investors  in  railroad  securi- 
ties must  also  take  the  risks  of  those  errors  of  judgment 
which  not  infrequently  attend  even  the  careful  manage- 
ment of  enterprises  conducted  for  profit.  But  they 
should  Ukewise  be  permitted  to  enjoy  fully  the  profits 
which  naturally  flow,  under  a  reasonable  scale  of  rates, 
from  the  exercise  of  good  judgment,  integrity,  and  effi- 
ciency in  the  management  of  such  properties.  While 
the  right  to  demand  a  higher  rate  may  be  denied  when 
the  existing  charge  is  reasonable,  even  though  the  par- 
ticular carrier  may  be  in  need  of  additional  earnings,  so 
a  carrier  may  be  entitled  to  a  higher  rate  for  a  particular 
service  because  the  existing  rate  is  unreasonably  low, 
although  the  carrier  may  not  be  in  need  of  additional 
revenues." 

§  7 

Summary 

In  the  first  section  of  this  chapter,  emphasis  was  laid 
on  the  difficulty  and  complexity  of  the  railroad  rate- 
regulating  problem,  flowing  from  the  variety  of  railroad 
services  and  the  factor  of  joint  costs.  We  then  con- 
sidered various  tests  as  to  the  general  reasonableness  of 

» Interstate    Commerce    Commission     Reports,  Vol.    XXXI,    pp.  35I-4S4- 
Decided  July  29,  1914. 
R 


242     TRANSPORTATION   COSTS  OF   COMMERCE 

rates,  which  have  been  applied  by  the  Interstate  Com- 
merce Commission.  We  found  that,  in  considerable  de- 
gree, the  Commission  has  been  guided  in  its  judgment 
of  reasonableness  by  comparison  of  rates  complained  of 
with  rates  on  like  goods,  with  rates  for  like  distances  on 
other  railroads  where  conditions  appeared  somewhat 
similar,  and  with  rates  between  other  points  than  those 
in  question,  on  the  same  railroad.  Though  we  saw  that 
the  test  by  comparison  could  hardly  be  an  ultimate  test, 
we  recognized  that  it  has  considerable  value  even  as  a 
test  of  general  reasonableness. 

The  reasonableness  of  rates  has  been  judged  by  the 
Commission,  to  a  large  extent,  in  connection  with  ascer- 
tainable facts  regarding  cost  of  service.  Special  costs  in- 
volved in  the  transportation  of  particular  commodities 
have  been  held  to  justify  higher  than  average  rates. 
So,  also,  high  average  costs,  due  to  lightness  of  traffic, 
have  been  held  to  justify  high  rates.  The  earnings  of  a 
railroad  have  been  regarded  as  having  a  bearing  on  the 
rates  which  may  be  charged.  But  in  judging  of  the  rates 
between  two  given  points,  the  Commission  has  said  that 
it  will  consider  the  rates  of  all  the  roads  and  not  merely 
of  the  cheapest.  Our  conclusion  was  that  two  places 
are  ordinarily  entitled  to  a  rate  between  them  based  on 
what  the  cheapest  practicable  route  would  have  to 
charge,  but  that  under  particular  circumstances  the  earn- 
ings of  a  relatively  roundabout  and  uneconomical  route 
might  properly  be  considered  in  fixing  rates. 

The  earnings  allowed  should  be  a  reasonable  return 
on  the  fair  value  of  railroad  property.  The  Commission 
has  indicated  that  it  considers  fictitious  capital  no  part 
of  this  fair  value,  but  has  not  been  exactly  clear  as  to 
whether  original  investment  or  present  physical  value 


RULINGS   AS  TO   REASONABLE   RATES        243 

is  the  fairest  basis  for  rate  regulation.  In  practice,  it 
seems  to  tend  toward  the  latter.  But  the  degree  of 
efl&ciency  of  management  is  not  to  be  lost  sight  of. 
Rates  must  yield  average  returns  on  investment  when 
management  is  reasonably  efficient.  Lower  rates  should 
not  be  made  where  and  because  management  is  excep- 
tionally efficient,  nor  should  inefficiency  be  an  excuse 
for  higher  rates. 


CHAPTER  X 

Rulings  of  the  Interstate  Commerce  Commission: 
Discrimination  among  Places 


Undue  Preference  in  Relation  to  Distance 

The  third  section  of  the  Act  to  Regulate  Commerce 
forbids,  among  other  things,  any  undue  preference  or 
advantage  to  any  particular  locality  and,  therefore,  by 
implication,  against  any  locality.  But  what  is  such 
preference  or  advantage? 

One  of  the  earliest  cases  before  the  Interstate  Com- 
merce Commission  ^  was  a  complaint  by.  the  Boston 
Chamber  of  Commerce  that  rates  from  Chicago  and 
some  other  western  points  to  Boston  were  unduly  high  as 
compared  with  the  rates  to  New  York  City  and  as  com- 
pared with  export  rates  via  Boston,  and  constituted 
undue  preference  and  advantage  to  New  York.  The 
Commission  held  that  the  export  rates  had  been  made 
for  the  purpose  of  putting  Boston  on  an  equahty  with 
New  York  and  other  seaboard  cities  wherever  it  was  a 
competitor  with  them.  But  the  haul  was  longer  to 
Boston  than  to  New  York  and  the  trafific  less  in  volume, 
and  in  other  ways  New  York  had  advantages  over 
Boston.     The  higher  local  rates  to  Boston  than  to  New 

1  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  436-464.  Decided 
February  15,  1888. 

244 


RULINGS   ON   PLACE   DISCRIMINATION     245 

York  were  therefore  upheld  as  not  being  unduly  dis- 
criminating. Difference  in  conditions,  including  dijfer- 
ence  in  distance  and  other  facts,  was  the  determining 
consideration. 

In  another  early  case,^  decided  in  1888,  the  complaint 
came  from  the  Detroit  Board  of  Trade  and  the  Detroit 
Merchants'  and  Manufacturers'  Exchange  and  was  to 
the  effect  that  Detroit  was  discriminated  against  by  the 
Grand  Trunk  and  the  New  York  Central  railroads.  It 
was  asserted  that  the  rates  to  Detroit  from  the  East 
and  from  Detroit  to  the  East  were  78  per  cent,  of  the 
Chicago  rate,  whereas  they  should  be  only  70  per  cent,  if 
fixed  on  the  basis  of  comparative  distance  and  of  geo- 
graphical position.  It  was  also  asserted  that  Detroit 
was  unjustly  discriminated  against,  because  the  per- 
centage of  the  through  rate  on  freight  passing  through 
Detroit,  east  or  west,  was  lower  than  the  corresponding 
rate  from  or  to  Detroit.  But  the  Commission  refused 
to  accept  the  contention  that  a  local  rate  ought  to  be  as 
low  as  a  proportion  of  a  through  rate  when  the  propor- 
tional distance  was  equal  to  the  distance  provided  for  in 
the  local  rate.  The  through  and  the  local  traffic  were 
said  to  be  carried  under  such  different  circumstances  and 
conditions  as  to  make  such  a  rule  as  the  complaintists 
favored,  inapplicable. 

In  a  case  decided  during  1890,^  the  complainant,  owning 
two  blast  furnaces  at  Poughkeepsie,  N.  Y.,  alleged  that 
rates  from  Poughkeepsie  to  points  in  Massachusetts 
were  unduly  high,  that  the  carriers  concerned  received 
a  less  sum  for  transportation  over  the  same  distances  to 
the  same  markets  when  the  goods  came  from  Youngs- 

•  Ibid.,  Vol.  II,  pp.  315-323.     Decided  October  22,  1888. 
*Ibid.,  Vol.  IV,  pp.  195-211.     Decided  October  20,  1890. 


246    TRANSPORTATION   COSTS   OF   COMMERCE 

town,  Ohio,  and  other  points  west  of  Albany,  N.  Y.,  and 
that  these  rates  gave  undue  preference  to  Youngstown 
and  other  western  points  and  to  shippers  there  located. 
The  Commission  again  emphasized  the  view  that  rates 
per  ton  mile  could  not  be  required  to  be  the  same  on 
through  as  on  local  trafl&c,  since  the  services  were  differ- 
ent.    Through  rates  on  long  hauls  more  usually  than 
local  rates  on  short  hauls  were  said  to  encounter  water 
competition,  and  for  this  reason  as  well  as  others,  are 
made   lower  in  proportion  to  distance.     Western  pro- 
ducers of  pig  iron  shipped  into  New  England  over  rail- 
roads which  had  to  meet  water  competition.     Southern 
producers  shipped  to  New  England  by  sea.      The  prin- 
cipal disadvantage  of  the  Poughkeepsie  blast  furnaces 
was  in  a  higher  cost  of  production  than  that  of  their 
western  and  southern  rivals.     The  transportation  rates 
charged   were   not   shown    to    be   unreasonable.    The 
Commission  would  not  lower  the  rates  from  Poughkeepsie 
and  it  neither  would  nor  could  raise  the  rates  from  west- 
ern producing  points.     It  did  not,  apparently,  regard  the 
alleged  preference  as  undue. 


Undue  Preference  in  Relation  to  Natural  Advantages  of 
Location 

In  the  Howell  milk  case,i  decided  in  1888,  the  burden  of 
the  complaint  was  to  the  effect  that  the  railroads  leading 
to  Jersey  city,  and  carrying  milk  to  the  New  York  market, 
were  charging  a  blanket  rate  for  all  milk  shipped,  regard- 
less of  whether  the  traffic  originated  (to  take  one  of  the 

» Interstate  Commerce  Commission  Reports,  Vol.  II,  pp.  272-300.  Decided 
September  24,  1888. 


RULINGS  ON  PLACE   DISCRIMINATION     247 

roads,  the  Erie,  as  an  example)  at  points  21  miles  or  183 
miles  from  Jersey  City.  It  was  contended  that  the 
nearer  points  should  have  lower  rates  and  that,  therefore, 
the  blanket  rate  system  subjected  them  to  unreasonable 
disadvantage  as  compared  with  what  their  location 
entitled  them  to.  The  Commission,  in  the  course  of  its 
discussion  of  the  case,  called  attention  to  the  fact  that 
although  expenses  for  receiving  and  delivering  freight, 
i.e.  the  so-called  terminal  expenses,  including  the  use  of 
terminals  and  other  facilities,  are  substantially  the  same, 
however  far  the  traffic  moves,  so  that  rates  ought  not  to 
increase  in  proportion  to  distance ;  yet,  ordinarily,  rates 
ought  to  increase  somewhat  as  distance  increased.  But 
in  the  particular  case  before  them,  it  appeared  that  most 
of  the  expenses,  including  many  which  were  not  terminal 
expenses,  were  not  greatly  affected  by  the  distance  the 
milk  was  carried.  The  practice  of  charging  a  blanket 
rate  was  therefore  upheld  as  not  being  unduly  discrim- 
inatory against  the  nearer  points. 

A  system  of  group  rates  was  likewise  sustained  in  a 
decision  during  1889  ^  involving  rates  on  coal  shipped  to 
Lake  Erie  from  points  covering  an  area  within  a  radius 
of  forty  miles  about  Pittsburg,  Pa.  The  complainants, 
located  in  the  center  of  this  district,  and  shipping  to 
Cleveland,  Ohio,  thought  that  their  greater  nearness  to 
the  Lake  Erie  market  should  entitle  them  to  lower  rates 
than  their  competitors,  whose  situation  was  less  favorable. 
The  Commission,  however,  upheld  the  blanket  rate 
system.  The  rates  complained  of  were  not  in  themselves 
unreasonable.  Higher  rates  from  the  more  remote  mines 
would  be  beneficial  to  the  railroads  as  well  as  to  the 
complainants,  provided  traffic  was  not  thus  decreased ; 

» Ibid.,  Vol.  U,  pp.  618-644.    Decided  March  23, 1889, 


248    TRANSPORTATION   COSTS   OF   COMMERCE 

but  such  rates  would  be  likely  to  diminish  the  business 
of  the  carriers  unless  the  nearer  mines  could  supply  the 
entire  market.  Otherwise,  the  Commission  suggested, 
much  of  the  market  might  be  supphed  by  coal  from  mines 
situated  on  other  railroads.  It  followed  that  the  group 
rate  made  by  the  defendants,  while  seemingly  discrim- 
inating against  the  nearer  points,  perhaps  enabled  coal 
to  be  shipped  from  the  farther  points,  thus  contributing 
towards  the  revenues  of  the  railroads  and  making  possible 
a  more  reasonable  rate  even  from  the  nearer  points  to 
market  than  might  otherwise  be  necessary.  The  prefer- 
ence and  advantage,  therefore,  was  not  regarded  by  the 
Commission  as  undue  or  unreasonable. 

In  a  previous  chapter,^  we  saw  that  there  may  some- 
times be  economic  justification  for  the  transportation  of 
goods  from  a  longer  distance  source  of  supply  than  from 
a  nearer  source,  to  the  same  market,  even  though  produc- 
tion costs,  exclusive  of  transportation,  are  the  same; 
for  the  longer  transportation  line  may  be  able  to  pay  more 
of  its  relatively  constant  expenses  from  its  intermediate 
traffic.  Yet  such  a  longer  Hne  may  not  be  able  to  afford 
to  make  its  intermediate  rates  correspondingly  low  in 
relation  to  distance.  The  argument  presented  in  Chap- 
ter V  2  might  justify  a  blanket  rate,  even,  perhaps,  lower 
rates  from  the  longer  distance  point,  over  the  longer 
Hne.  But  if  the  argument  thus  presented  is  correct, 
similar  discriminating  rates  over  all  possible  hues  leading 
to  a  common  market  would  probably  be  economically 
undesirable,  even  though  the  discrimination  did  not 
involve  lower  rates  but  only  as  low  rates,^  from  the  more 

1  Chapter  II,  §  4.     See,  also,  Chapter  V,  §  2.  2  §§  i  and  2. 

3  In  Chapters  II  and  V  only  the  problem  of  lower  rates  for  the  longer  distance 
was  discussed,  but  the  principles  brought  out  can  easily  be  extended  to  cover  the 
more  general  problem  of  discrimination. 


RULINGS   ON   PLACE   DISCRIMINATION     249 

distant  points.  When,  as  was  asserted  to  be  the  situation 
in  the  Howell  milk  case,  the  actual  costs  are  nearly  the 
same  for  all  distances,  a  blanket  rate  is  substantially 
fair.  But  when  the  actual  costs,  because  of  greatly 
different  distances,  are  substantially  dissimilar,  a  blanket 
rate,  with  the  exception  above  noted  in  the  case  of  a 
longer  Une,  is  probably  without  economic  justification. 
And  even  in  the  case  of  such  a  longer  line,  there  is  a  limit 
beyond  which  the  system  of  a  blanket  rate  ought  not  to 
extend,  for  if  the  sources  of  supply  on  such  a  line  are  at 
widely  different  distances  from  the  market,  the  extra 
cost  of  hauling  from  the  longer  distance  points  becomes  so 
considerable  that  an  equally  low  rate  —  if  reasonable  for 
the  nearer  points  —  would  involve  carrying  at  a  loss. 
Furthermore,  as  was  pointed  out  in  earlier  chapters,^  if 
restrictions  are,  as  indeed  they  ought  to  be,  put  on  dis- 
crimination by  the  railroads  carrying  to  market  over  a 
shorter  distance,  railroads  carrying  goods  over  longer 
distances  cannot  properly  be  left  entirely  without  restric- 
tions. 

In  1897  the  Interstate  Commerce  Commission  decided 
a  case  brought  by  the  Milk  Producers' Protective  Associa- 
tion against  the  railroads  serving  New  York  and  Jersey 
City.  The  complaint  was  that  a  blanket  rate  was  being 
charged  for  the  transportation  of  milk  and  cream  from 
points  nearer  than  50  miles  and  as  far  as  340  miles  from 
the  New  York  City  market.^  In  this  case,  the  Com- 
mission was  convinced  that  the  cost  of  rendering  the 
service  was  not,  as  in  the  Howell  case  they  thought  it 
was,  substantially  the  same  for  all  the  distances  involved, 

'  Chapter  II,  §  2,  and  Chapter  V,  §§  i  and  2. 

*  See  Interstate  Commerce  Reports,  Vol.  VII,  pp.  92-175.  Decided  March 
13,  1897. 


2  so    TRANSPORTATION   COSTS   OF   COMMERCE 

but  that  it  cost  something  more,  in  wear  and  tear,  etc., 
for  every  additional  mile  the  milk  was  carried,  and  that 
the  total  cost  for  the  longer  distances  was  very  appre- 
ciably greater  than  for  the  shorter.  The  extreme  dis- 
tances from  which  the  milk  was  carried  to  New  York 
were  much  greater  than  in  the  Howell  case.  The  prac- 
tice was,  therefore,  held  to  be  unduly  prejudicial  against 
the  nearer  producing  points  and  to  deprive  them  of  an 
advantage  to  which,  because  of  their  nearness  to  the 
market,  they  were  fairly  entitled.  The  Commission, 
accordingly,  ordered  the  estabhshment  of  a  number  of 
zones,  including,  respectively,  all  points  within  a  radius 
of  40  miles  of  the  New  Jersey  terminal,  all  points  between 
40  and  100  miles  from  Jersey  City,  all  points  between 
100  and  190  miles,  and  all  points  beyond  190  miles.  The 
rate  from  all  points  within  any  zone  was  to  be  blanketed, 
but  the  rates  from  the  nearer  zones  were  to  be  lower  than 
from  the  farther.^ 

So  far  as  the  blanket  rate  on  milk  for  differences  of 
distance  amounting  to  several  hundreds  of  miles  tended 
to  encourage  the  production  of  milk  far  from  the  metro- 
poHtan  market  and  so  discourage  its  nearer  production, 
at  the  expense  of  greater  actual  cost  of  transportation, 
the  system  was  uneconomical  and  the  order  forbidding  it 
was  justifiable.  All  the  railroads  leading  into  Jersey 
City  and  New  York  from  different  directions  had  been 
applying  the  blanket  system  of  rates.  An  order  for  its 
discontinuance  directed  against  any  one  road  would  have 
subjected  that  road  to  a  great  disadvantage  as  compared 
with  its  competitors  going  through  other  milk-producing 
regions.     But  an  order  directed  against  all  the  railroads 

1  There  were  some  minor  modifications  of  the  scheme,  which  we  need  not 
here  discuss. 


RULINGS  ON   PLACE  DISCRIMINATION     251 

concerned  would  tend  to  raise  the  plane  of  competition, 
would  do  away  with  an  economically  wasteful  policy, 
and  would  yet  leave  the  diflerent  railroads,  for  the  most 
part,  in  the  same  relative  situations  as  before.  In  such 
a  case  as  this,  there  is  not  likely  to  be  any  adequate  reason 
for  making  concessions  from  the  rule  to  lines  serving  the 
more  distant  sources  of  supply,  in  order  to  put  all  the 
roads  on  a  par  and  enable  the  longer  to  compete ;  for 
milk  can  be  produced  at  almost  any  point  on  almost  any 
of  the  lines.  Such  concessions,  therefore,  if  made  at  all, 
would  probably  have  to  be  made  to  all  the  roads,  and 
would  introduce  an  uneconomical  principle  of  rate  making 
without  serving  any  good  purpose.  All  of  the  roads  are, 
probably,  about  on  a  par  if  concessions  are  made  to  none. 
On  the  whole  it  would  seem  that,  in  this  instance  at  least, 
the  attempt  to  preserve  for  each  district  its  natural 
advantages  of  location  had  been  most  commendable. 
Furthermore,  even  if  the  circumstances  which  would 
justify  some  extension  of  a  blanket  rate  were  present, 
there  would  still  be  limits  beyond  which  it  should  not  be 
applied,  and  it  would  be  a  matter  for  special  considera- 
tion in  each  case,  when  those  limits  were  passed. 

In  the  Eau  Claire  lumber  case,^  the  right  of  a  producing 
center  to  its  natural  advantages  of  location  was  again 
discussed.  Eau  Claire  was  a  lumber-producing  point  in 
Wisconsin  on  the  Chicago,  Milwaukee  and  St.  Paul 
Railroad.  The  lumber  was  marketed  at  points  on  the 
Missouri  River,  where  the  lumber-producing  interests  of 
Eau  Claire  met  competition  from  lumber-producing 
points  farther  south  along  the  Mississippi  River,  but 
particularly  from   the  near-by  points,  Winona  and  La 

*  Interstate  Commerce  Commission  Reports,  Vol.  V,  pp.  264-298.  Decided 
Jime  17,  1892. 


252    TRANSPORTATION   COSTS   OF   COMMERCE 

Crosse.  The  system  of  rates  in  question  had  been  estab- 
lished in  1884  by  an  arbitrator,  after  a  rate  war  between 
the  railroads  carrying  lumber  west  to  Missouri  River 
points.  The  aim  of  the  arbitrators'  decision,  as  it  was 
interpreted  by  the  Commission,  was  to  put  the  various 
lumber-producing  centers  on  an  equaHty  in  the  common 
market.  Eau  Claire  had  certain  natural  advantages 
over  its  rivals,  such  as  nearness  to  the  source  of  timber 
supply,  etc.  Hence  the  rates  charged  from  Eau  Claire 
had  been  made  much  higher  than  the  rates  charged  from 
Winona  and  La  Crosse,  with  the  idea  that,  having  these 
natural  advantages,  Eau  Claire  could  pay  higher  rates 
and  still  be  on  a  par  with  its  rivals.  As  a  matter  of  fact, 
the  rates  charged  were  so  discriminatory,  that  even  its 
natural  advantages  were  not  sufficient  to  keep  Eau 
Claire  on  an  equality  of  business  and  population  with  its 
neighboring  rivals.  The  Interstate  Commerce  Commis- 
sion expressed  vigorous  disapproval  of  the  principle  of 
fixing  rates  **  in  inverse  proportion  to  the  natural  advan- 
tages of  competing  towns  with  the  view  of  equahzing 
'commercial  conditions.'  .  .  .  Each  community,"  it 
was  said,  "  is  entitled  to  the  benefits  arising  from  its 
location  and  natural  conditions,  and  the  exaction  of 
charges,  unreasonable  in  themselves  or  relatively  unjust, 
by  which  those  benefits  are  neutralized  or  impaired, 
contravenes  ahke  the  provisions  and  the  policy  of  the 
statute." 

As  a  general  proposition  relating  to  the  policy  of  a 
single  railroad,  such  a  decision  would  appear  to  be  in 
conformity  with  the  principles  emphasized  in  this  book.^ 
Eau  Claire  was  somewhat  farther  from  the  Missouri 
River  market  than  Winona  and  La  Crosse,  and  was  on  a 

1  See  particularly  Chapter  IV,  §  2. 


RULINGS   ON   PLACE   DISCRIMINATION     253 

branch  of  the  railroad.  A  slightly  higher  rate  from  Eau 
Claire  was  justifiable.  But  a  rate  arbitrarily  made  much 
higher,  for  the  purpose  of  putting  Eau  Claire  on  a  par 
with  rivals  having  less  natural  advantages,  was  uneco- 
nomical, tending  to  divert  industry  from  a  place  where 
it  could  be  most  effectively  applied,  to  places  where 
its  apphcation  would  bring  smaller  results. 

But,  on  the  other  hand,  the  decision  of  the  arbitrator, 
in  1884,  could  not  well  have  been  based  on  any  other 
principle  as  between  the  rival  railroads.  While  it  was  not 
at  all  necessary  to  put  each  producing  center  upon  an 
equality  with  each  other  such  center,  without  regard  to 
comparative  natural  advantages,  a  basis  of  permanent 
peace  among  the  rival  roads  could  hardly  have  been 
arrived  at  except  by  such  a  relation  of  rates  as  would 
enable  each  railroad,  which  was  in  a  position  to  compete 
for  it,  to  handle  a  share  of  the  business.  In  other  words, 
the  producing  centers  on  one  railroad  must  be  given 
such  rates  that  they  could  compete  on  fairly  even  terms 
with  producing  centers  on  the  other  railroads ;  but  the 
different  places  on  any  one  railroad,  it  might  not  be 
necessary  to  put  on  an  equality.  If  the  more  advanta- 
geously located  points  did  greater  business  and  other 
points  on  the  same  line  less  business,  in  consequence  of 
non-discriminating  rates,  the  railroad  would  be  as  fully 
utilized  as  otherwise,  and  economic  waste  would  be,  to 
an  extent,  avoided. 

But  unless  it  is  desired  to  pick  out  some  one  road 
(or  a  selected  few)  to  carry  the  goods  in  question  —  in 
this  case  lumber  —  to  a  given  market,  unless  it  is  desired 
to  prevent  any  rivalry  of  different  railroads  and  different 
producing  centers,  we  must,  to  an  extent,  allow  the 
railroads  serving  different  producing  centers,  each  to 


254    TRANSPORTATION   COSTS   OF  COMMERCE 

take  some  traffic.  That  each  such  road,  if  necessary, 
anyway,  to  the  communities  it  serves,  should  carry  some 
of  this  particular  competitive  traffic,  rather  than  that 
the  facilities  of  one  or  a  few  railroads  should  be  increased 
so  as  to  allow  it  to  carry  all  such  traffic,  may  be  actually 
more  economical  in  additional  cost  to  the  community, 
and  even  if  not,  at  the  time,  more  economical,  may  be 
advantageous  in  the  end  because  of  the  stimulus  to 
efficiency  which  rivalry  involves. 

It  might,  of  course,  happen  that  one  of  several  lines 
leading  to  a  common  market  was  capable  of  carrying  a 
greatly  increased  traffic,  and  that  it  could  get  this  traffic 
only  by  discriminating  rates  in  favor  of  a  lumber-pro- 
ducing center  on  its  lines  the  natural  advantages  of  which 
were  less  good  than  those  of  rival  points  also  on  its  own 
lines.  At  the  same  tune,  it  might  happen  that  the  other 
railroads,  serving  various  rival  producing  centers,  were 
so  fully  utilized  as  to  require  additional  construction  if 
they  were  to  carry  more  traffic.  The  question  would 
then  be,  if  more  lumber  could  be  sold  in  the  common 
market,  whether  the  fully  utiUzed  Hnes  should  increase 
their  trackage,  or  whether  the  incompletely  utilized 
line  should  discriminate  so  as  to  carry  to  the  market  not 
only  lumber  from  the  naturally  advantaged  producing 
centers  along  its  line  but  also  from  producing  centers 
less  advantageously  situated.^  Since  this  line  is  pre- 
sumably needed,  anyway,  it  may  be  economically  desir- 
able that  it  should  take  this  traffic  even  though  discrim- 
ination is  necessary  to  enable  the  Une  to  do  so,  rather  than 
that  other  lines  should  unnecessarily  expand  their  plants. 
If,  however,  the  effect  of  the  discrimination  is  not  to 
increase  the  business  of  this  line  by  increasing  the  total 

» Cf.  Chapter  II,  §  4,  and  Chapter  V,  §§  i  and  2. 


RULINGS   ON   PLACE   DISCRIMINATION     255 

amount  of  lumber  marketed,  but  to  cause  lumber  to  be 
carried  from  the  less  favorably  situated  instead  of  from 
the  more  favorably  situated  points  on  that  line,  the 
discrimination  is  clearly  uneconomical. 

The  Cincinnati  Freight  Bureau  case  ^  involved  in 
a  somewhat  different  way  the  problem  of  natural 
advantages  of  location.  This  case,  to  which  reference 
has  already  been  made  in  another  connection,^  was 
brought  by  Cincinnati  and  Chicago  interests  with  the 
purpose  of  securing  lower  rates  on  manufactured  goods 
from  Central  Traffic  Association  territory  to  points  in 
the  South.  The  chief  difficulty  appeared  to  be  the  high 
rates  charged  by  the  roads  south  of  the  Ohio  River. 
Those  roads  were  members  of  the  Southern  Railway  and 
Steamship  Association  and  were  apparently  charging 
these  rates  as  part  of  an  understanding  with  the  eastern 
roads  south  of  the  Potomac,  to  protect  the  latter  in  their 
transportation  of  manufactured  goods  from  eastern 
cities  to  the  South.  The  rates  from  the  Middle  West 
to  the  South  were  therefore  much  higher  than  the  rates 
from  the  East  to  the  South,  with  the  consequence  that 
middle  western  manufacturers  could  not  do  business  in 
the  South  on  equal  terms  with  their  eastern  competitors, 
though  their  sales  in  the  West  enabled  them  to  maintain 
and  increase  their  total  business.  Had  competition 
been  unrestricted,  it  is  likely  that  the  roads  from  the 
Middle  West  to  the  South  would  have  made  lower  rates 
on  manufactured  goods,  in  order  to  have  a  larger  share 
in  supplying  the  southern  market,  in  order  to  divert 
part  of  the  manufactured  goods  from  their  movement 

•  Interstate  Commerce  Reports,  Vol.  VI,  pp.  195-256.  Decided  May  29, 
1894. 

« See  Chapter  IX,  §  3. 


256    TRANSPORTATION   COSTS  OF  COMMERCE 

westward  over  other  lines  (competition  of  directions), 
and  in  order  to  build  up  to  a  greater  extent  manufacturing 
in  the  Middle  West,  from  which  a  permanently  larger 
traffic  might  have  resulted  to  the  railroads  leading  thence 
to  the  South  (competition  of  locations).     But  instead, 
at  the  behest  of  the  southeastern  railways,  there  was  a 
purposed  scheme  of  discouraging  the  development  of 
this  potential  business.     The  Interstate  Commerce  Com- 
mission   expressed   most   vigorous    disapproval   of    the 
poHcy  followed,  emphasizing  the  rule  that  rates  should 
always  be  reasonable.     "No  departure  from  this  rule," 
it  was  pointed  out,  "can  be  justified  on  the  ground  that 
it  is  necessary  in  order  to  maintain  existing  trade  rela- 
tions, or  to  'protect  the  interests  of  competing  markets,' 
or  to  'equalize  commercial  conditions,'  or  to  secure  to 
carriers  traffic  from   certain   territory  assumed  to  be 
exclusively  theirs.     It  is  not  the  duty  of  carriers,  nor  is  it 
proper  that  they  undertake  by  adjustment  of  rates  or 
otherwise  to  impair  or  neutralize  the  natural  commercial 
advantages  resulting  from  location  or  other  favorable 
condition  of  one  territory  in  order  to  put  another  territory 
on  an  equal  footing  with  it  in  a  common  market.     Each 
locahty  competing  with  others  in  a  common  market  is 
entitled  to  reasonable  and  just  rates  at  the  hands  of  the 
carriers  serving  it  and  to  the  benefit  of  all  its  natural 
advantages.  ...     If   this   result  in   prejudice   to   one 
and  advantage  to  another,  it  is  not  the  undue  prejudice 
or  advantage  forbidden  by  the  statute,  but  flows  natu- 
rally from  conditions  beyond  the  legitimate  sphere  of  legal 
or  other  regulation." 

With  the  quahfications  which  have  been  previously 
stated,  the  principle  here  set  forth  by  the  Commission, 
and  the  application  of  it  to  the  particular  case  under 


RULINGS   ON   PLACE   DISCRIMLNATION     257 

discussion/  must  commend  themselves  as  just.  But 
the  quahiications  are  not  entirely  without  importance, 
though,  if  properly  applied,  they  must  add  appreciably 
to  the  complexity  and  difficulty  of  the  regulating  prob- 
lem. Their  appUcation  would  serve  to  emphasize  the 
necessity  for  dealing  with  each  case  by  itself  and,  there- 
fore, would  serve  to  emphasize  the  impossibility  of 
regulating  transportation  rates  in  any  other  way  than 
by  means  of  a  commission  empowered  to  consider  all 
the  circumstances  of  each  particular  case. 

§3 

Undue  Preference  to  Traffic  Moving  Entirely  or  Largely 
over  the  Discriminating  Railroad 

In  the  case  of  the  Colorado  Fuel  and  Iron  Company  v. 
The  Southern  Pacific  Company  et  al.,^  decided  in  1895, 
the  complainants  showed  that  rates  on  iron  and  steel 
articles  from  Pueblo,  Col,  to  San  Francisco  were  much 
higher  than  the  corresponding  rates  from  points  much 
more  distant  from  San  Francisco,  though  the  carrier's 
cost  from  Pueblo  was  much  less;  and  it  was  con- 
tended that  these  high  and  discriminatory  rates  pro- 
hibited the  movement  of  iron  and  steel  goods  from 
Pueblo  to  San  Francisco.  Some  of  the  testimony  seemed 
to  show,  according  to  the  interpretation  of  the  Interstate 
Commerce  Commission,  that  the  Southern  Pacific 
Railroad  was  discriminating  in  favor  of  traffic  originating 
at  Chicago  and  going  west  via  New  Orleans,  and  against 

>  It  should  be  remembered,  however,  that  the  order  fixing  maximum  rates 
in  this  case  was  set  aside  by  the  Supreme  Court,  167  U.  S.,  479.  on  the  ground 
that  under  the  law  at  that  time  the  Commission  might  not  establish  future  rates. 

» Interstate  Commerce  Reports,  Vol.  VI,  pp.  4SS-SI9-  Decided  November 
25.  1895. 

S 


258    TRANSPORTATION   COSTS  OF   COMMERCE 

traffic  originating  at  Pueblo,  partly  because  on  the  former 
its  share  of  the  total  haul  was  much  greater.  Discussing 
this  policy,  the  Commission  said :  "The  action  of  a  carrier 
in  diverting  through  traffic  from  a  shorter  route  over 
which  it  participates  in  carriage,  so  as  to  secure  for  itself 
greater  aggregate  revenue  through  a  long  haul  by  a 
different  route  over  which  it  is  also  engaged  in  trans- 
portation, sometimes  results  in  discriminations  and 
prejudices,  both  as  to  rates  and  facihties ;  and  inequahty 
in  treatment  of  shippers  and  localities,  having  no  other 
justification  than  this  end,  is  indefensible."  Inde- 
pendently, also,  of  this  alleged  motive  and  purpose  for 
discriminating,  the  Commission  found  that  the  rates 
from  Pueblo  were  unreasonable  in  themselves  and  that 
they  subjected  Pueblo  to  undue  disadvantage  in  com- 
parison with  other  points  of  shipment  over  the  defendant 
railroad  to  San  Francisco. 

In  the  Pueblo  case  the  discrimination  complained  of 
was  primarily  against  a  producing  center.  The  Savannah 
Naval  Stores  case  ^  is  an  instance  of  discrimination  against 
a  market,  Savannah,  Ga.,  and  in  favor  of  a  rival  market, 
Pensacola,  Fla.  On  cotton  and  naval  stores  shipped 
eastward  to  Savannah  from  stations  on  the  Pensacola 
and  Atlantic  division  of  the  Louisville  and  Nashville 
Railroad,  the  rates  charged  by  that  road  were  very  much 
higher  than  the  rates  charged  for  corresponding  distances 
westward  to  Pensacola.  The  purpose  was  to  force  ship- 
ments westward  in  order  to  develop  Pensacola  and  in 
order  to  give  the  Louisville  and  Nashville  a  long  haul  via 
Pensacola  to  Louisville  or  Cincinnati.  The  Commis- 
sion required  a  reduction  in  the  rates  charged  on  ship- 

>  Interstate  Commerce  Reports,  Vol.  VIII,  pp.  377-408.  Decided  January  8, 
1900. 


RULINGS   ON   PLACE   DISCRIMINATION     259 

ments  eastward,  thus  decreasing  the  extent  of  the  dis- 
crimination, but  it  allowed  the  Louisville  and  Nashville 
to  charge  for  its  share  of  the  total  rate  to  Savannah,  rates 
equal  to  its  full  local  rates  for  corresponding  distances 
to  Pensacola,  notwithstanding  the  fact  that  traffic  to 
Savannah  was  through  traflfic  in  conjunction  with  con- 
necting lines,  and  notwithstanding  the  fact  that  the 
Commission  has,  in  other  decisions,  held  that  a  through 
rate  which  is  the  sum  of  local  rates,  is  prima  facie  unrea- 
sonable. Unless  the  Commission  feared  that  the  courts, 
under  the  law  as  to  court  review,  etc.,  as  it  then  existed, 
would  not  uphold  any  stricter  decision,  there  would 
seem  to  have  been  no  adequate  justification  for  a  ruling 
so  lax.  Certainly  there  was  no  sufficient  economic 
justification  for  it.  The  normal  development  and  the 
most  profitable  development  of  national  industry  requires 
that  producers  shall  have  reasonable  access  to  all  markets 
and  not  to  a  few  or  one  market  only. 

In  1909,  after  the  Hepburn  Law  of  1906  had  Umited 
the  extent  of  court  review  and  had  given  the  Interstate 
Commerce  Commission,  in  definite  terms,  the  power  to 
establish  through  routes  and  joint  rates,  the  Commission 
rendered  a  decision  ^  more  completely  in  accord  with 
correct  economic  principles.  The  Chamber  of  Commerce 
of  the  city  of  Milwaukee  complained  that  shortly  after 
the  Burlington,  Cedar  Rapids  and  Northern  Railway 
Company  came  to  be  controlled  by  the  Chicago,  Rock 
Island  and  Pacific  Railway  Company,  in  1902,  all  joint 
grain  rates  to  ]\Iilwaukee  from  the  local  non-competitive 
points  on  the  line  of  the  Burlington,  Cedar  Rapids  and 
Northern  were  withdrawn  except  on  wheat  and  barley. 
Such  joint  rates  had  previously  been  made  in  connection 

'  Jbid.,  Vol.  XV,  pp.  460-467.    Decided  March  2,  1909. 


26o    TRANSPORTATION  COSTS  OF   COMMERCE 

with  the  Chicago,  Milwaukee  and  St.  Paul,  and  the 
Chicago   and   Northwestern,    to   both   Milwaukee   and 
Chicago  as  well  as  to  other  primary  grain  markets.     The 
purpose  of  the  complainants  was  to  secure  the  reopening 
of  the  through  routes  to  Milwaukee  from  local  points  on 
the  Burlington,  Cedar  Rapids  and  Northern,  and  the 
reestabUshment  of  joint  through  rates  on  corn,  rye,  and 
oats  to  Milwaukee  on  the  basis  of  the  existing  rates  on 
those  grains  to  Chicago.     The  Rock  Island  road  not  only 
refused  to  join  in  through  rates  on  corn,  rye,  and  oats 
to  Milwaukee,  but  expressed  its  purpose  to  withdraw 
the  joint  rates  to  which  it  was  a  party  on  wheat  and 
barley.     The  claim  of  the  Rock  Island,  in  defense,  was 
that  the  absorption  by  it  of  the  Cedar  Rapids  road  gave 
the  enlarged  system  the  right  to  enjoy  the  long  haul  to 
Chicago,  over  its  own  route,  and  gave  it  the  right,  in 
protection  of  its  revenues,  to  so  adjust  its  rates  as  to 
force  the  grain  to  Chicago  and  divert  it  from  Milwaukee, 
regardless  of  the  fact  that  many  shippers  of  grain  might 
prefer    the    latter    market.     The  very  purpose  of  the 
acquisition  of  the  Cedar  Rapids  road  was  said  to  be  to 
use  it  as  a  feeder.     To  compel  the  Rock  Island,  therefore, 
to  turn  traffic  originating  on  the  Cedar  Rapids  road  over 
to  a  rival  was  not,  in  the  view  of  the  defense,  a  fair  and 
proper  exercise  of  authority. 

"In  general,"  said  the  Commission,  in  giving  its 
decision,  "the  carriers  may  demand  of  the  shipping 
pubHc  nothing  beyond  a  reasonable  compensation  for 
the  services  rendered.  It  cannot  force  its  services  upon 
a  shipper  or  insist  upon  carrying  his  shipment  to  one 
market  when  he  desires  to  reach  another  market.  It 
has  no  right  to  insist  that  a  shipment  shall  go  to  the  end 
of  its  rails  if  the  shipper  desires  it  to  be  diverted  at  an 


RULINGS   ON   PLACE   DISCRIMINATION     261 

intermediate  point  to  another  market  off  its  rails,  nor 
may  the  carrier  accomplish  these  results  indirectly  by 
any  unreasonable  adjustment  of  its  rate  schedules  with 
that  end  in  view.  It  cannot  lawfully  compel  the  ship- 
ping public  to  contribute  to  its  revenues  on  any  such 
grounds." 

The  interests  of  the  railways,  broadly  considered,  are 
no  oiTset  to  the  general  economic  evils  of  such  discrim- 
ination as  we  are  now  considering.  For  any  railroad 
which  follows  the  policy  of  refusing  to  prorate  with  rival 
roads,  in  order  to  keep  as  much  freight  as  possible  on 
its  own  lines,  injures  such  other  roads  fully  as  much  as 
it  benefits  itself,  and  if  such  a  policy  is  allowed  to  become 
general,  the  average  railroad  will  be  no  less  often  dis- 
criminated against  than  discriminating.  From  the  point 
of  view  of  shippers  and  consumers,  however,  it  may  be 
desirable  that  some  rivalry  of  alternative  routes  and 
directions  of  shipment  should  be  preserved.  To  this  end 
a  railroad  should  perhaps  be  allowed  to  bid  for  long  hauls 
over  its  own  rails  by  offering  exceptionally  low  rates, 
leaving  other  railroads,  with  which  its  rails  connect  for 
the  transportation  to  other  markets,  free  to  bid  against 
such  low  rates  by  accepting  a  low  share  of  a  joint  through 
rate.  But  the  railroad  which  thus  bids  for  a  long  haul 
over  its  own  rails  should  be  required  in  all  cases  to  accept 
a  reasonable  compensation  as  its  share  of  a  joint  through 
rate  from  shippers  who  prefer  to  have  their  shipments 
sent  to  other  markets  over  connecting  lines.  And  in 
every  case  the  rates  charged  by  it  for  the  longer  haul 
over  its  own  rails  should  be  enough  higher  than  its  share 
of  the  rate  for  the  shorter  haul,  to  pay  something,  how- 
ever little,  above  the  additional  cost  incident  to  hauling 
the  freight  a  longer  distance. 


262    TRANSPORTATION   COSTS   OF   COMMERCE 

§4 

The  Long  and  Short  Haul  Clause,  and  Comparative  Size 

of  Cities 

In  several  cases,  the  railroads  have  sought  to  justify 
lower  rates  to  a  longer  distance  point  than  to  a  shorter, 
over  the  same  Hne  in  the  same  direction,  by  emphasizing 
the  greater  population  and  business  of  the  longer  distance 
point.  This  was  part  of  the  defense  in  the  Alabama 
Midland  case.^  The  Alabama  Midland  Railway  had 
been  making  lower  rates  to  and  from  Montgomery  than 
Troy,  Ala.,  on  traffic  which  passed  through  Troy  in  going 
to  or  from  Montgomery.  It  was  explained  by  the  defense 
that  Montgomery  was  a  larger  city  than  Troy  and  a 
trade  center.  The  practice  of  giving  large  towns  and 
trade  centers  discriminating  rates  was  declared  by  the 
Commission,  however,  to  be  antagonistic  to  the  whole 
spirit  and  purpose  of  the  Interstate  Commerce  Law. 
Though  the  Commission's  decision  in  this  case  was  over- 
ruled by  the  courts  ^  acting  under  their  interpretation 
of  the  unamended  law,  yet,  since  the  law  has  since  been 
amended  in  the  direction  of  enlarging  the  Commission's 
jurisdiction  and  power,  the  ruling  in  question  is  of 
continuing  significance. 

In  another  case,^  involving  comparative  rates  from  the 
East  to  San  Bernardino  and  Los  Angeles,  Cal.,  the 
Commission,  while  justifying  lower  rates  to  Los  Angeles 
because  of  water  competition  at  Port  Los  Angeles,  a 
Pacific  Coast  point  near  Los  Angeles,  refused  to  coun- 
tenance an  argument  for  discrimination  based  on  the 

1  Interstate  Commerce  Reports,  Vol.  VI,  pp.  1-35.     Decided  August  15, 1893. 

*  See  168  U.  S.,  144. 

•Interstate  Commerce  Reports,  Vol.  IX,  pp.  42-60.    Decided  April  13,  igoi. 


RULINGS   ON   PLACE   DISCRIMINATION     263 

relative  sizes  of  the  cities  concerned.  The  fact  that  Los 
Angeles  was  a  larger  town  than  San  Bernardino,  having 
more  business,  for  which  competition  was  fiercer,  was 
asserted  not  to  justify  discrimination  between  them. 
The  railroads  serving  these  two  cities  should  not  agree 
to  compete  at  one  and  not  compete  at  the  other.  They 
must  not  favor  one  more  than  another  simply  because 
it  was  stronger  to  begin  with. 

This  ruling  would  appear  to  be  entirely  in  accord  with 
correct  economic  principles.  To  permit  discrimination 
in  favor  of  one  place  as  against  another  tends  to  increase 
the  business  and  population  of  the  former  and  to  decrease 
that  of  the  latter.  If  the  difference  in  amount  of  business 
and  in  size  is  thus  made  an  excuse  for  discrimination,  we 
have  a  vicious  circle  of  cause  and  effect.  Once  a  town  has 
outdistanced  its  rivals,  the  larger  shipments  of  goods  to 
and  from  it  may  possibly  make  the  cost  of  carrying  these 
goods  somewhat  lower  per  ton  mile.  But  this  fact  can 
be  taken  notice  of  in  the  relative  ton-mile  rates  on  large 
versus  small  quantities  of  goods,  e.g.  on  carload  versus 
less-than-carload  lots.  It  does  not  ordinarily,  if  ever, 
justify  discrimination  in  favor  of  the  one  place,  as  such, 
as  against  other  places. 

§  5 

The  Long  and  Short  Haul  Clause,  and  Discrimination 
by  the  Longer  or  Longest  Line 

In  very  many  cases  the  Interstate  Commerce  Com- 
mission has  permitted  the  longer  of  two  or  more  compet- 
ing lines  between  two  points  to  make  lower  rates  on 
their  competitive  traffic  than  on  intermediate  traffic. 
That  it  has  from  the  beginning  been  the  policy  of  the 


264    TRANSPORTATION  COSTS  OF   COMMERCE 

Commission  to  make  exceptions  from  the  long  and  short 
haul  rule  in  many  cases,  for  roundabout  lines,  was  pointed 
out  in  a  previous  chapter.'  In  the  St.  Cloud  case,^  how- 
ever, the  Commission  refused  to  allow  this  departure 
from  the  rule  by  the  long  line,  the  Northern  Pacific  Com- 
pany, contending  that  such  departure  would  tend  to 
increase  the  discrimination  against  St.  Cloud,  the  inter- 
mediate point,  that  the  shorter  competing  hues  were  con- 
forming to  the  requirement  and  would  be  completely  at 
the  mercy  of  the  longer  line  if  it  alone  were  unrestricted, 
and  that  the  general  enforcement  of  the  long  and  short 
haul  rule  would,  in  other  cases,  be  to  the  advantage  of  the 
defendant  railroad.  To  the  claim  that  the  Northern 
Pacific  was  not  increasing  the  discrimination  because  it 
merely  met  the  rates  on  the  competitive  traffic,  made  by 
the  other  railroads,  the  Commission  replied  that  it  is 
impossible  to  determine,  in  the  majority  of  instances, 
"which  one  of  several  competitors  is  responsible  for  a 
given  reduction  or  a  given  advance  in  rates."  The 
Northern  Pacific  Railroad  was  therefore  forbidden  to 
charge  more  for  the  short  than  for  the  long  haul. 

In  the  Danville,  Va.,  case,^  the  Commission  expressed  a 
similar  view  with  regard  to  the  possibility  of  concluding 
that  one  fine  simply  met  the  rates  made  by  its  com- 
petitors. The  Southern  Railway  carried  traffic  to  and 
from  Lynchburg,  Va.,  and  also  to  and  from  Danville, 
an  intermediate  point.  The  rates  to  Danville  were  much 
higher  than  to  Lynchburg.  At  Lynchburg,  the  Southern 
Railway  had  to  compete  with  the  Chesapeake  and  Ohio 

>  Chapter  VIII,  §  3. 

» Interstate  Commerce  Reports,  Vol.  VIII,  pp.  346-363.  Decided  November 
29,  i8Qg. 

^  Ibid.,  Vol.  VIII,  pp.  409-442  and  571-584.  Decided  November  17, 
1900. 


RULINGS   ON   PLACE   DISCRIMINATION     265 

and  the  Norfolk  and  Western  railroads.  At  Danville, 
the  Southern  had  no  competition.  The  Southern  Rail- 
way was  the  long  line  to  Lynchburg  and  its  claim  was 
that  it  simply  met,  at  Richmond,  Lynchburg,  and  Nor- 
folk, the  rates  made  by  the  other  railroads.  The  Com- 
mission, however,  refused  to  accept  the  theory  that  the 
Southern  Railway  merely  met  its  competitors'  rates,  or 
that  it  exercised  no  influence  over  the  competitive  situa- 
tion. At  the  moment  when  the  Southern  J&rst  put  in 
force  the  rates  of  the  other  railroads,  its  doing  so  may 
not  have  increased  the  discrimination  against  Danville, 
but  considered  as  a  continuing  fact,  its  participation  in 
the  competitive  business  as  a  rival  of  the  other  companies, 
could  not  be  assumed  to  have  been  altogether  without 
effect.  In  view  of  all  the  circumstances  involved,  the 
'Commission  did  not  require  that  the  Danville  rates 
should  be  made  as  low  as  the  Lynchburg  rates,  but  it  did 
order  that  there  should  be  a  fixed  relation  between  them, 
the  Danville  rates  exceeding  those  to  and  from  Lynchburg 
by  from  10  to  15  per  cent.  This  order,  had  the  Commis- 
sion's authority  been  clear  under  the  unamended  law, 
would  have  made  the  intermediate  rates  to  and  from 
Danville  depend  upon  the  Southern's  longer  distance 
rates  and  so  would  have  made  any  irresponsible  compe- 
tition by  this  line  impossible,  while  yet  recognizing,  in 
some  degree,  the  dissimilarity  of  circumstances  and 
conditions  to  which  the  longer  line  was  subjected. 

Since  the  strengthening  of  the  long  and  short  haul 
clause,  in  1910,  and  of  the  Commission's  authority  with 
regard  to  exceptional  cases  arising  under  it,  the  Com- 
mission seems  to  have  adopted  a  more  lenient,  and,  it 
is  believed,  a  too  lenient  attitude.  The  policy  has  been 
followed,  to  a  large  extent,  of  allowing  roundabout  Unes 


266    TRANSPORTATION  COSTS   OF   COMMERCE 

to  charge  less  for  the  long  competitive  haul  than  for  the 
short  non-competitive  haul.  But  in  no  case,  apparently, 
except  where  the  competition  has  been  with  water  car- 
riers/ has  the  Commission  required  the  long  line  to 
maintain  any  particular  relation  between  its  long-dis- 
tance and  its  short-distance  rates.  In  its  Twenty-fifth 
Annual  Report,^  the  Commission  sets  forth  the  conditions 
under  which  it  has  allowed  departure  from  the  rule  by 
a  long  hne.     These  are  that : 

"The  long  line  has  been  manifestly  circuitous. 

"The  short  hne  has  observed  the  fourth  section  at 
intermediate  points. 

"The  intermediate  rates  upon  the  long  line  are  appar- 
ently reasonable  and  just  and  are  not  under  attack. 

"  When  these  conditions  have  been  met,"  continues 
the  Commission,  "we  have  permitted  the  long-line  to 
meet  the  short-line  rate.  In  so  doing  we  have  not  under- 
taken to  fix  a  relation  between  the  long-distance  rate  and  the 
intermediate  rate^  but  have  usually  provided  that  the  in- 
termediate rate  shall  not  be  advanced  above  the  present 
rate.  These  orders  permit  the  circuitous  route  to  meet 
not  only  the  present  rate  made  by  the  short  line,  but  any 
future  rate  which  that  line  may  name.  In  case  of  reduc- 
tion by  the  short  hne  the  long  hne  might  therefore  cor- 
respondingly reduce  its  rate  at  the  competitive  point 
without  any  reduction  of  its  intermediate  rates, ^  but  it  could 
not  in  any  case,  as  long  as  it  charges  less  at  the  more 
distant  point,  advance  its  intermediate  rates  above  those 
in  effect  at  the  time  of  the  making  of  the  order." 

This  pohcy,  it  will  be  seen,  in  many  cases  allows  the 
short  line  to  reduce  the  long-distance  rate  only  by  sub- 

»  See  §  8  of  this  Chapter  (X).  *  Page  26. 

'  The  italics  are  the  present  writer's. 


RULINGS  ON   PLACE   DISCRIMINATION     267 

mitting  to  a  reduction  of  intermediate  rates,  while  the 
long  line  is  enabled  to  reduce  its  long-distance  rates  with- 
out suffering  any  other  loss  in  revenues.  This  is  hardly 
an  ideal  arrangement,  though  it  may  be  much  better 
than  no  regulation  at  all.  It  is  unnecessary  to  repeat  the 
argument,  so  often  set  forth  in  these  pages,^  that  trans- 
portation by  a  roundabout  line  may  sometimes  be  socially 
the  most  economical,  and  that  to  permit  such  transporta- 
tion it  may  frequently  be  necessary  to  let  such  a  round- 
about line  make  lower  rates  on  the  long-distance  than  on 
intermediate  traffic.  But  it  has  also  been  pointed  out 
that  to  let  the  long  line  depart  without  limit  from  the 
long  and  short  haul  rule,  while  not  allowing  any  departure 
at  all  by  more  direct  lines,  gives  the  long  line  an  advan- 
tage over  its  rivals  even  if  transportation  by  it,  because 
of  its  greater  length  or  for  other  reasons,  is  appreciably 
less  economical  than  by  a  direct  route. 

Furthermore,  in  permitting  the  long-line  to  "meet" 
the  short-line  rate,  the  Commission  seems  not  to  have 
ruled  consistently  with  its  earlier  opinion,  expressed  in 
the  St.  Cloud  and  Danville  cases,  that  it  is  usually  impos- 
sible to  determine  which  line  merely  "meets"  the  rates 
of  its  competitors,  and  that,  in  the  long  run,  each  addi- 
tional competitor  for  the  long-distance  business  must 
be  assumed  to  exercise  some  influence  over  the  long- 
distance rates. 

§6 

The  Long  and  Short  Haul  Clause  and  "Market" 
Competition 

The  term  "market  competition"  seems  to  be  used  to 
designate  those  competitive  relations  which  have  been 

1  Chapter  II,  §  2,  Chapter  V,  §  i,  and  this  Chapter  (X),  §  2. 


268    TRANSPORTATION   COSTS   OF   COMMERCE 

described  in  a  previous  chapter  ^  of  this  book,  as  competi- 
tion of  directions  and  competition  of  locations.  We  have 
seen  that  in  the  case  of  such  competition,  as  in  the  case 
of  competition  of  routes,  there  may  be  economic  justifica- 
tion for  discrimination  against  intermediate  traffic  by  a 
longer  line.^ 

In  the  case  of  competition  of  directions  or  of  locations, 
the  long  line  would  not  necessarily  be  roundabout,  but 
would  be  one  connecting,  a  source  of  supply  with  a 
relatively  distant  market  or  a  market  with  a  relatively 
distant  source  of  supply.  To  illustrate,  we  may  take 
a  case  presented  to  the  Commission,  and  summarized 
in  its  Twenty-fifth  Annual  Report.^  This  case  involved 
lumber  rates  from  Georgia,  Florida,  and  the  Southeast  to 
Cairo,  111.  Pine  lumber  of  substantially  the  same  quality 
is  produced  along  the  southern  part  of  the  United  States 
all  the  way  from  the  Atlantic  Ocean  to  middle  Texas. 
From  these  various  districts,  railroad  lines  converge  at 
Cairo.  The  fines  leading  from  the  Southeast  were  main- 
taining a  lower  rate  to  Cairo  than  to  intermediate  points, 
and  justified  themselves  for  so  doing,  on  the  ground  that 
Cairo  could  be  supplied  with  lumber  from  the  Southwest, 
South,  and  Southeast,  that  the  mills  to  the  South  and,  to 
some  extent,  to  the  Southwest,  were  nearer  to  Cairo  than 
those  of  the  Southeast.  The  railroads  leading  to  Cairo 
from  the  Southeast  wished,  therefore,  to  charge  rates  low 
enough  on  lumber  trafiic  to  Cairo  to  put  their  more  dis- 
tant producing  centers  on  a  par  with  producing  centers 
c.t  points  nearer  the  common  market,  without  thereby 
having  to  reduce  their  immediate  rates. 

Obviously,    cases   of   this   sort   are   very   similar,   in 

1  Chapter  II,  §§  3  and  4.  2  See  Chapter  II,   §  4,  and  Chapter  V,  §  2. 

'  Page  26. 


RULINGS   ON, PLACE    DISCRIMINATION     269 

principle,  to  cases  involving  the  competition  of  a  round- 
about line.  While  it  will  frequently,  perhaps  generally, 
be  more  economical  that  goods  should  be  carried  to  a 
market  from  the  nearest  source  of  supply,  if  production 
costs  at  that  source  of  supply  are  as  low  as  elsewhere, 
yet,  as  we  have  seen,  considerations  regarding  utilization 
of  railroad  plant,  etc.,  may  sometimes  make  it  more 
economical  to  bring  goods  to  a  common  market  from  a 
relatively  distant  producing  center.  But  this  possibility 
the  Commission  seems  never  to  have  reaHzcd,  at  least 
to  the  extent  of  allowing  the  longer  line  to  discriminate. 
Probably  it  would  not  be  fair  to  say  that  the  Commission 
has  given  no  consideration  to  such  conditions  as  justifying 
departure  from  the  rule  of  the  fourth  section,  but  such 
market  competition  seems  not  to  have  been  recognized 
by  the  Commission  as  being,  of  itself,  a  sufficient  reason 
for  departing  from  the  rule.^ 

§7 

The  Long  and  Short  Haul  Clause  in  its  Proper  Application 
to  a  Direct  Line  with  Light  Traffic  Competing  with  a 
More  Roundabout  Line  Having  Dense   Traffic 

The  Interstate  Commerce  Commission  has  stated,  in  its 
twenty-fifth  and  twenty-seventh  annual  reports,-  the 
conditions  under  which  it  has  been  willing  to  grant  reUef 
from  the  strict  rule  of  the  fourth  section.  No  mention 
is  made,  however,  of  one  type  of  case  which  might  easily 
arise  and  in  which  relief  ought  to  be  granted.  This  is 
the  case  of  a  direct  line  having  light  traffic  and,  there- 

•  Twenty-fifth  .\nnual  Report  of  the  Interstate  Commerce  Commission,  p.  27 ; 
Twenty-seventh  Annual  Report,  pp.  27-28. 
'  Pages  19-41  and  23-28  respectively. 


270    TRANSPORTATION   COSTS   OF   COMMERCE 

fore,  high  average  expenses  per  ton  mile,  and  having  to 
meet,  in  long-distance  traffic,  the  competition  of  a  slightly 
longer  line  which,  nevertheless,  having  denser  traffic  and 
lower  average  expenses  per  ton  mile,  is  able  to  make 
appreciably  lower  ton-mile  rates.  The  economic  justi- 
fication for  lower  long-haul  rates  by  the  more  direct  fine 
was  elaborated  in  an  earlier  chapter,^  and  need  not  be 
repeated  here.  Such  a  case  may  not  yet  have  been 
presented  to  the  Commission  since  the  larger  powers 
have  been  conferred  upon  it.  But  if  such  a  case  should 
be  presented,  there  is,  perhaps,  even  more  reason  for 
allowing  departure  from  the  rule  than  in  the  more  usual 
case  of  the  roundabout  line. 

Possibly  the  second  Chattanooga  case,^  decided  in 
1904,  is  a  case  of  this  sort,  though  the  decision  of  the 
Commission  was  probably  not  so  much  an  expression  of 
the  opinion  of  that  body  as  to  what  ought  economically 
to  be  done,  as  it  was  a  necessary  consequence  of  the 
Supreme  Court's  decisions  limiting  its  authority.  Traffic 
from  the  East  to  Nashville,  Tenn.,  might  follow  a  south- 
ern route  via  Chattanooga,  or  it  might  follow  a  more 
northern  route,  somewhat  longer,  through  Trunk  Line 
Territory,  Central  Traffic  Association  Territory,  Cincin- 
nati, and  Louisville.  The  rates  to  Chattanooga  were 
higher  than  to  Nashville.  The  line  leading  to  Nashville 
via  Chattanooga  was  departing  from  the  rule  of  the 
fourth  section.  But  Nashville  was  nearer  to  Central 
Traffic  Association  Territory,  where  traffic  was  more 
dense  and  average  rates  lower.  Hence  it  had  low  rates 
from  the  East  based  on  rates  to  Cincinnati  and  Louis- 
ville.    The   line    through    Chattanooga   had    to   make 

1  Chapter  V,  §  3. 

*  Interstate  Commerce  Reports,  Vol.  X,  pp.  111-147.  Decided  March  12, 1904. 


RULINGS   ON   PLACE   DISCRIMINATION     271 

equally  low  rates  to  Nashville  if  it  was  to  take  any  of  the 
traffic,  and  as  it  was  a  shorter  line  than  any  other,  it 
may  well  have  been  economically  desirable  that  it  should 
have  a  considerable  share  of  this  business.  But  it  perhaps 
did  not  follow,  in  view  of  the  lighter  traffic  in  the  South, 
that  all  its  intermediate  rates  should  be  reduced  in  the 
same  degree.     The  Commission  dismissed  the  complaint. 

§8 

The  Long  and  Short  Hani  Clause  and  Water  Competition 

Water  competition,  when  of  controlling  influence,  the 
Interstate  Commerce  Commission  has  from  the  fitrst 
recognized  as  a  reason  for  granting  relief  from  the  opera- 
tion of  the  fourth  section.  One  of  the  early  cases  of  this 
nature  was  the  Readville  case  ^  involving  rates  from  New 
York  City  to  Readville,  an  intermediate  point  near 
Boston,  as  compared  with  rates  from  New  York  to 
Boston.  The  rates  to  Readville  were  higher  than 
to  Boston.  It  was  proved  that  between  New  York 
and  Boston  there  was  substantial  water  competition, 
which  did  not  exist  at  Readville,  and  which  forced  down 
the  Boston  rate.  For  this,  among  other  reasons,  the 
Commission  found  that  the  circumstances  controlling 
the  longer  distance  traffic  were  substantially  dissimilar 
and  justified  the  difference  in  rates. 

A  more  recent  case,  and  one  which  has  aroused  con- 
siderable interest,  is  that  which  resulted  in  the  Com- 
mission's order,  in  the  Spokane  case  of  191 1,  establishing 
a  zone  system  of  transcontinental  rates.-     The  reader  is 

*  Ibid.,  Vol.  IV,  pp.  251-264.     Decided  October  30,  1S90. 
'  See  Ibid.,  Vol.  XXI,  pp.  400-427,  and  Twenty-fifth  .\nnual  Report  of  the 
Interstate  Commerce  Commission,  pp.  27-41.    Decided  Jmie  22,  1911. 


272    TRANSPORTATION   COSTS   OF   COMMERCE 

doubtless  already  familiar  with  the  long-established 
general  system  of  transcontinental  rates,^  i.e.  the  system 
of  making  the  same  rates  to  Pacific  Coast  and  near-coast 
points  from  all  points  east  of  the  Missouri  River,  and 
even,  in  some  cases,  from  points  farther  west,  and  of 
making  the  rates  to  intermountain  territory  by  adding 
to  the  coast  rates,  the  locals  back. 

The  Commission  ruled,  as  we  have  previously  seen,^ 
that  from  points  west  of  the  Missouri  River,  rates  to 
intermountain  points  should  not  at  all  exceed  those  to 
the  coast,  that  from  Chicago  and  points  west  of  Chicago 
the  discrimination  might  not  exceed  7  per  cent.,  that 
from  Buffalo  and  Pittsburg  territory,  rates  to  intermoun- 
tain points  might  not  be  discriminatory  by  more  than  15 
per  cent.,  while  the  discrimination  against  intermountain 
territory  and  in  favor  of  Pacific  Coast  cities  on  trafiic 
from  Atlantic  Seaboard  territory  so-called, might  be  25 
percent. 

The  larger  per  cent,  discrimination  against  inter- 
mountain territory,  allowed  on  traffic  from  cities  on  and 
near  the  Atlantic  Coast,  was  explained  as  a  recognition 
of  water  competition.  Goods  from  Boston,  New  York, 
and  other  coast  points  could  easily  and  cheaply  go  to  the 
Pacific  Coast  by  water.  Hence  the  railroads  must  make 
low  rates  if  they  would  get  a  share  of  the  business.  But 
they  could  not  be  expected  to  make  equally  low  rates 
on  their  intermediate  trafiic.  They  should,  therefore, 
if  the  competitive  rates  yielded  some  return  above  oper- 
ating cost,  be  allowed  to  engage  in  competitive  business, 
even  though  their  intermediate  rates  could  not  be  made 
correspondingly  low.  It  was  pointed  out  in  a  previous 
chapter  ^  that  a  railroad,  the  plant  of  which  is  necessary 

1  See  Chapter  V,  §  4- 


RULINGS   ON   PLACE   DISCRIMINATION 


273 


because  of  the  requirements  of  intermediate  trallic,  may 
sometimes  further  subserve  the  economic  interests  of 
the  community  by  taking  traffic  for  which,  otherwise, 
additional  capital  would  have  to  be  invested  in  water 
transportation  facilities. 

From  points  farther  west,  e.g.  Chicago,  the  Commission 
did  not  believe  that  water  competition  was  of  nearly  so 
much  importance.  Goods  were,  to  a  slight  extent, 
shipped  eastward  from  this  territory  to  the  Atlantic 
Coast  and  thence  by  water  to  Pacific  Coast  points.  It 
might  be  contended,  therefore,  that  water  competition 
had  some  influence  on  rates  to  the  Pacific  Coast,  even 
from  points  as  far  west  as  Chicago.  But  this  influence 
was  believed  to  be  slight.  Hence,  the  Commission  con- 
cluded that  there  was  no  adequate  excuse  for  so  wide  a 
discrimination  against  intermountain  territory,  on  traffic 
originating,  say,  at  Chicago,  as  on  traffic  originating  at 
New  York  or  Baltimore. 

As  a  matter  of  fact,  it  was  not  primarily  direct  water 
competition  that  fixed  rates  from  such  points  as  Chicago 
and  St.  Louis  to  the  Pacific  Coast  on  the  same  basis  as 
rates  from  the  Atlantic  seaboard.  Rather  was  it,  as  the 
Interstate  Commerce  Commission  recognized,  primarily 
so-called  market  competition  (competition  of  directions 
or  of  locations  or  both) .  The  transportation  lines  leading 
from  middle  western  centers  to  the  Pacific  Coast  might 
conceivably  have  charged  higher  rates  than  were  charged 
for  transportation  clear  across  the  continent,  since  water 
competition  was  not  met  in  the  former  case  to  anything 
like  the  same  degree.  But  these  lines  from  the  Middle 
West  desired  to  keep  Chicago,  St.  Louis,  and  other  cities 
on  a  par  with  more  eastern  cities  in  the  Pacific  Coast 
markets,  and  so  insisted  upon  maintaining  rates  to  the 

X 


2  74    TRANSPORTATION   COSTS   OF   COMMERCE 

Far  West  just  as  low  as  were  enjoyed  by  eastern  coast 
cities.  The  railroads  leading  from  the  Middle  West 
to  the  Far  West  could  thus  build  up  the  middle  western 
producing  and  trade  centers  and  would  receive  the  en- 
tire rate  from  shipments  westward  over  their  own  lines, 
whereas  they  could  get  only  a  share  of  the  rate  on  coast 
to  coast  traffic  dehvered  to  them  by  their  eastern  con- 
nections. If,  therefore,  these  western  railroads  could 
afford  to  meet  the  water-compelled  transcontinental 
rates,  their  prosperity  might,  in  the  long  run,  be  increased 
by  their  doing  so.  Nor  can  we  conclude  that  the  general 
economic  welfare  of  the  nation  would  necessarily  be 
affected  adversely.  If  it  is  desirable  that  some  trans- 
continental trafi&c  should  be  carried,  by  rail,  at  low  rates, 
rather  than  by  water,  may  it  not  be  equally  justifiable 
economically  for  these  goods  to  be  carried  by  rail 
from  a  near  source  of  supply  rather  than  a  far  source  ?  ^ 
We  may,  if  we  choose,  think  of  the  competition  as  being, 
in  part,  a  competition  of  markets  between  water  trans- 
portation lines  on  the  one  hand  and  the  rail  lines  from 
the  Middle  West  on  the  other.  In  this  view,  the  rail 
lines  from  (say)  Chicago  to  San  Francisco  or  Portland, 
are  endeavoring  to  develop  Chicago  as  a  center  of  produc- 
tion from  which  to  supply  the  Pacific  Coast,  in  competi- 
tion with  water  carriers  which  are  endeavoring  to  supply 
Pacific  Coast  cities  from  Boston,  New  York,  Baltimore, 
etc.  The  same  argument  can  be  applied  to  show  that 
such  rail  competition  may  be  entirely  legitimate,  eco- 
nomically considered,  as  could  be  applied  were  the  com- 
petition with  a  water  carrier  a  competition  of  routes. 
The  rail  lines  from  the  Middle  West  must  exist  anyhow 
for  the  sake  of  traffic  in  goods  for  the  production  of  which 

*  Cf.  argument  of  the  defendants  in  this  case. 


RULINGS  ON   PLACE   DISCRIMINATION     275 

this  region  has  superior  advantages.  May  it  not  be  as 
economical  to  utilize  more  completely  these  transporta- 
tion lines,  making  other  industries  also  center  in  the 
Middle  West,  as  to  construct  and  maintain  more  ocean- 
going ships  with  which  to  supply  the  Far  West  from  the 
Atlantic  Coast? 

The  Interstate  Commerce  Commission  gave  weight  to 
contentions  of  this  sort,  although  inclining  to  the  belief 
that  the  interests  of  the  railroads  would  be  subserved  by 
giving  interior  far  western  points,  like  Spokane,  rates 
which  would  build  up  those  points,  as  against  Pacific 
Coast  points,  just  as  Chicago  and  St.  Louis  were  being 
protected  as  against  Atlantic  Coast  cities. 

The  order  of  the  Commission,  in  this  case,  reducing 
the  permitted  discrimination  against  Spokane  and  other 
intermountain  cities,  according  as  traffic  originated 
farther  and  farther  west,  would  seem  to  have  had  ade- 
quate economic  justification.  For  on  traffic  from  (say) 
the  Middle  West,  the  same  rate  as  from  New  York  is 
collected  for  a  shorter  haul.  The  rate  per  mile,  the  rate 
as  measured  by  services  rendered,  is  appreciably  higher. 
Hence,  it  does  not  require  so  great  an  addition  to  the 
terminal  rate  from  the  Middle  West  to  make  the  inter- 
mediate rate  unreasonable  in  itself.  Or,  to  put  the  matter 
in  a  different  light,  the  distance  from  the  Middle  West  to 
intermountain  territory  is  less  than  from  the  Atlantic 
Coast,  and,  therefore,  a  lower  rate  is  reasonable  for  the 
service  rendered,  even  though  a  lower  rate  than  from 
Atlantic  Coast  cities  is  not  accepted  on  traffic  to  the 
Pacific  Coast. 


276    TRANSPORTATION   COSTS  OF   COMMERCE 

§9 

Import  and  Export  Rates 

In  the  Import  Rate  case/  the  Interstate  Commerce 
Commission  took  the  ground  that,  since  it  had  no  juris- 
diction over  conditions  in  European  countries  whence 
goods  were  shipped  to  the  United  States,  no  consid- 
eration could  be  given  to  these  conditions  as  bearing 
upon  the  question  whether  import  traffic  was  carried, 
by  American  railroads,  under  different  conditions  than 
purely  domestic  traffic.  The  Supreme  Court,  however, 
overruled  the  Commission  on  this  point,^  asserting  that 
the  Commission  must  consider  all  the  conditions  to  which 
the  traffic  in  question  might  be  subject,  whether  at  home 
or  abroad,  in  order  to  determine  whether  discrimination 
in  favor  of  import  traffic  was  undue.  But  with  the 
present  increased  authority  of  the  Commission  over 
absolute  rates,  undue  discrimination,  etc.,  there  seems 
no  reason  to  assume  that  that  body  would  look  with 
favor  on  any  discrimination  in  favor  of  import  traffic, 
unless  the  reason  for  it  would  justify  discrimination, 
under  corresponding  circumstances,  in  favor  of  purely 
domestic  traffic  between  given  points. 

In  the  Boston  Chamber  of  Commerce  case,^  the  Com- 
mission recognized,  at  least  by  implication,  that  rates  by 
a  longer  line  might  be  lower  to  the  port  of  shipment,  for 
export,  than  for  domestic  consumption.  The  Commission 
called  attention  to  the  fact  that  the  railroads  made  rates 
to  Boston,  for  export,  as  low  as  to  New  York,  in  order  to 

1  Interstate  Commerce  Commission  Reports,  Vol.  IV,  pp.  447-534-  Decided 
January  29,  1891. 

2  See  162  U.  S.,  197. 

'  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  436-464.  Decided 
February  15,  1888. 


RULINGS   ON   PLACE   DISCRIMINATION     277 

put  Boston,  so  far  as  possible,  on  a  par  with  New  York ; 
while  at  the  same  time  it  was  recognized  that  the  domestic 
rate  to  Boston,  because  the  distance  was  greater,  might 
be  higher  than  to  New  York. 

In  the  Export  Rate  case,^  the  Commission  very  defi- 
nitely put  itself  on  record  in  favor  of  the  principle  that 
the  railroads  constituting  parts  of  the  longer  and  more 
roundabout  routes  to  Europe,  in  particular  the  railroads 
to  Boston,  Portland,  Me.,  and  the  Gulf  ports,  should  be 
allowed  to  charge  less  as  their  share  of  the  export  rate  on 
grain  to  Europe  than  they  charged  to  the  same  ports  for 
domestic  use.  This  was  on  the  assumption  that  there 
was  no  discrimination  by  the  most  direct  line  or  lines, 
and  is  consistent  with  the  theory  that  the  longer  lines 
should  be  allowed,  within  reasonable  limits,  to  meet  the 
competition  at  competitive  points,  of  the  shorter. 

In  the  Export  Rate  case,  the  Commission  discussed  at 
length  the  problem  whether  discrimination  in  favor  of 
export  grain  is  ever  of  general  economic  advantage. 
Their  conclusion  was  that  such  economic  advantage 
could  seldom  result  from  discriminating  rates  on  export 
corn  but  might  occasionally  result  from  low  export  rates 
on  wheat.  Europe's  corn  market,  it  was  said,  was 
dominated  by  the  corn  of  the  United  States,  and  lower 
transportation  rates,  encouraging  our  export  of  corn, 
would  so  oversupply  the  European  market  as  greatly  to 
depress  prices,  at  the  expense  of  American  railroads  and 
with  no  great  gain  to  American  producers.  But  in  the 
case  of  wheat,  the  American  supply  was  a  less  proportion 
of  the  total,  so  that  the  Liverpool  price  of  wheat  might 
be  said,  with  some  show  of  reason,  to  dominate  the 
Chicago  price.     Hence,  reduced  rates  for  the  transporta- 

^Ibid.,  Vol.  VIII,  pp.  214-276.     Decided  August  7,  1899. 


278    TRANSPORTATION  COSTS   OF   COMMERCE 

tion  of  wheat  might  raise  the  price  to  American  producers 
instead  of  lowering,  in  any  great  degree,  the  price  to 
foreign  consumers.  In  a  previous  chapter,'  the  attempt 
was  made  to  show  that  discrimination  in  favor  of  exports 
is  a  species  of  bounty  except  when  the  larger  traffic  so 
stimulated  pays  as  well  as  or  better  than  a  smaller  trafiic 
at  higher  rates.  In  other  words,  the  discrimination  is 
not  economically  good  if  the  railroads  lose  by  it.  For 
though  it  may  seem  as  if  wheat  producers  (for  example) 
gain  more  than  the  railroads  lose,  yet  since  this  gain  is 
at  the  expense  of  higher  rates  necessarily  required  of 
other  shippers,  it  will  discourage  other  business,  and  will 
encourage  wheat  production  and  export  up  to  the  point 
where  it  is  no  longer  more  profitable  —  at  the  margin  — ■ 
than  other  kinds  of  business.  In  other  words,  other 
kinds  of  business  are  taxed,  yet  those  in  the  favored  line, 
at  the  margin  of  production,  derive  no  gain.  Industry 
is  turned  unduly  and  uneconomically  out  of  its  natural 
channels. 

The  Commission  discussed,  also,  in  this  case,  the 
advantage  of  lower  export  rates  in  years  of  plentiful 
harvests,  as  a  means  of  maintaining  a  stable  price  of 
wheat  to  the  producers. 

§  10 
Summary 

Some  of  the  most  difficult  problems  with  which  the 
Interstate  Commerce  Commission  has  had  to  deal  have 
involved  discrimination  between  places.  Such  discrim- 
ination is  forbidden  in  general  terms  in  section  3  of  the 
Interstate  Conamerce  Law,  as  undue  preference ;   and  a 

»  Chapter  V,  §  6. 


RULINGS   ON   PLACE   DLSCRIMINATION     279 

particular  form  of  it  is  forbidden  in  section  4.  In  deter- 
mining what  is  undue  preference,  the  Commission  has 
given  attention  to  the  element  of  distance,  but  has  care- 
fully pointed  out  that  rates  for  a  long  distance  may 
properly  be,  as  a  rule,  lower  per  mile  than  for  a  short 
distance.  Greater  likelihood  of  water  competition, 
constancy  of  terminal  expenses,  and  other  facts  are  held 
to  justify  such  a  practice.  In  general,  every  place  is 
entitled  to  its  natural  advantages  of  location.  Agree- 
ments among  railroads  to  deprive  any  locality  of  such 
natural  advantages  have  been  held  to  be  contrary  to  the 
Interstate  Commerce  Act.  Yet  the  Commission  has 
upon  occasion  upheld  a  limited  application  of  blanket 
rates  which  required  nearer  points  to  pay  as  much  as 
farther  distance  points  to  reach  a  given  market.  Under 
some  circumstances  and  within  reasonable  limits,  per- 
mission to  do  this  does  not  operate  unfavorably  to  the 
general  welfare.  For  the  most  part,  the  Commission 
has  been  opposed  to,  and,  it  is  believed,  justly  opposed 
to,  attempts  of  railroads  to  get  and  keep  traffic  on  their 
own  lines  by  discriminating  in  their  rates  against  traffic 
which  they  receive  from  or  deliver  to  connecting  railroads. 
Industry  may  be  thus  turned  out  of  its  most  profitable 
channels,  and  the  railroads  themselves,  taken  as  a  whole, 
are  not  gainers. 

Larger  size  of  city  is  not  regarded  by  the  Commission 
as  a  sufficient  reason  for  a  lower  rate  over  the  same  line 
in  the  same  direction  to  the  longer  distance  point  than  to 
a  nearer  and  smaller  place.  Nor  is  competition  between 
railroads  regarded  as  a  sufficient  reason  —  with  the 
Commission's  present  authority  —  except,  under  special 
circumstances,  in  the  case  of  roundabout  lines.  The 
Commission  frequently  allows  roundabout  Unes  to  meet 


28o    TRANSPORTATION  COSTS  OF   COMMERCE 

rates  made  by  their  more  direct  competitors,  without 
compelUng  the  former  class  of  roads  to  lower  their  inter- 
mediate rates,  provided  the  intermediate  rates  are 
reasonable.  This  policy  of  the  Commission  seems  incon- 
sistent with  previous  opinions  of  that  body  to  the  effect 
that  it  is  impossible  to  tell  what  line  makes  and  what 
line  merely  meets  a  rate.  Our  conclusion  was  that  a 
fixed  relation  between  the  rates  on  the  longer  distance 
and  on  intermediate  traffic,  which  would  give  some,  but 
not  too  much,  leeway  to  the  longer  line,  according  to  the 
circumstances  in  each  case,  might  be  a  preferable  policy. 
There  appeared,  also,  to  be  some  doubt  whether  the 
Commission  was  right  in  its  policy  of  not  allowing  de- 
partures from  the  rule  of  the  fourth  section,  to  the  lines 
carrying  competitive  traffic  the  longer  distances,  in  the 
case  of  competition  of  "markets."  Nor  has  the  Com- 
mission yet  seemed  to  recognize  —  though  perhaps  no 
proper  case  has  yet  come  before  it  —  the  economic 
validity  of  permitting  shorter  fines  to  depart  from  the 
rule  in  cases  where  they  compete  with  longer  lines  having 
heavier  traffic  and  lower  average  rates.  Water  competi- 
tion the  Commission  has  rightly  recognized  as  justifying, 
in  many  cases,  departure  from  the  long  and  short  haul 
rule,  e.g.  in  the  transcontinental  zone-rate  decision. 

As  to  import  rates,  there  seemed  no  reason  to  assume 
that  the  Commission  would  rule  differently  than  in  the 
case  of  domestic  rates.  The  possibility  of  a  different 
ruling  with  regard  to  export  rates  was  recognized  but  the 
conditions  which  would  lead  to  such  a  rufing  would 
seldom  arise  in  practice.  A  part  of  the  Commission's 
reasoning  in  the  Export  Rate  case  was  subjected  to 
critical  analysis  in  the  fight  of  the  conclusions  of  an 
earfier  chapter  of  this  book. 


CHAPTER  XI 

Rulings  of  the  Interstate  Commerce  Commission: 
Discrimination  among  Different  Goods  and 
AMONG  Shippers 

§1 

Relative  Rates  on  Competing  Goods 

The  Interstate  Commerce  Commission  early  recog- 
nized the  principle,  defended  in  Chapter  VI  of  this 
book,  that  the  rates  ^  on  goods  which  are  substitutes 
for  each  other  ought  to  be  in  such  relation  as  not  to 
give  to  either  an  undue  advantage  in  common  markets 
over  its  rival  commodity.  One  of  the  earliest  cases  of 
this  sort  originated  in  a  complaint  by  the  manufacturers 
of  Pearline,  that  the  rates  charged  for  its  transportation 
to  various  points  in  the  South  were  much  higher  than 
the  rates  charged  for  the  transportation  of  laundry 
soap,  a  competitive  article.^  The  Commission  ordered 
a  considerable  decrease  in  the  discrimination,  but  allowed 
the  rates  on  Pearline  to  remain  somewhat  higher  than 
the  rates  on  laundry  soap,  largely  ^  because  of  the  greater 
value  of  Pearline  and  the  greater  risk  of  damage  to  it  in 
transit. 

If  Pearline  and  laundry  soap  were  perfect  substitutes 

»§i. 

*  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  465-470.  Decided 
February  15,  1888. 

'  See,  however,  §  3  of  this  Chapter. 

281 


282    TRANSPORTATION   COSTS   OF   COMMERCE 

for  all  uses,  so  that  discrimination  in  rates  in  favor  of 
either  could  have  no  other  effect  than  to  shift  pubhc 
demand  from  one  to  the  other,  a  difference  in  the  value 
of  the  goods  would  not  justify  a  difference  in  rates. 
Under  such  circumstances,  railroads  could  hope  to  gain 
nothing  by  reducing  or  raising  rates  on  the  one  com- 
modity, which  they  could  not  equally  well  gain  by 
treating  both  commodities  alike.  And  the  discrimination 
might  tend  to  influence  disadvantageously  the  lines  of 
industry  followed.  But  the  mere  fact  that  the  two  com- 
modities are  of  different  values  indicates  that  they  are 
probably  not  perfect  substitutes,  and  this  indication  is 
borne  out,  in  the  case  of  PearUne  and  laundry  soap,  by 
practical  experience.  Each  article  is  used  for  some  pur- 
poses for  which  the  other  could  not  well  be  used  and 
each  is  used  for  some  purposes  for  which  the  other  would 
be  less  satisfactory.  It  follows  that  the  effect  of  higher 
or  of  lower  rates  may  not  be  the  same  on  one  as  on  the 
other,  that  one  may  be  able  to  bear  higher  rates  than 
the  other  without  a  corresponding  decrease  in  demand, 
and  that  considerations  connected  with  the  covering  of 
fixed  and  general  expenses,  and  with  the  matter  of 
utilization  of  railroad  plant,  may  justify  some  degree 
of  discrimination.  How  much  discrimination  is  justi- 
fiable in  any  such  case  must  depend  on  the  degree  in 
which  the  articles  are  substitutes  and  the  extent  to  which 
they  are  used  for  different  purposes  or  are  sold  to  differ- 
ent classes  of  purchasers.' 

*  It  should  be  pointed  out,  perhaps,  that  in  the  case  of  trade-marked  articles, 
one  is  scarcely  ever,  in  the  minds  of  purchasers,  a  perfect  substitute  for  another. 
If,  in  fact,  the  one  article  sells  for  a  higher  price,  and  is  perhaps  sold  to  a  different 
class  of  purchasers  than  the  other,  a  sliRht  difference  in  transportation  rates 
may  be  defensible  even  though  either  article  could  serve  every  purpose  for  which 
the  other  is  used. 


RULINGS   ON   OTHER   DISCRIMINATION     283 

Another  case  ^  involving  relative  rates  on  substitutes 
luid  to  do  with  the  charges  for  carrying  cowpeas  as 
compared  with  the  charges  for  carrying  fertilizer.  It 
was  urged  by  the  complainants  that  cowpeas  were  used 
as  a  fertilizer  and  therefore  ought  to  be  classified  with 
fertilizers  and  carried  for  like  rates.  The  Commission 
pointed  out,  however,  that  cowpeas  were  used  not  only 
for  fertilizer  but  also,  to  some  extent,  as  food.  It 
followed  that  fertilizer  and  cowpeas  were  by  no  means 
complete  substitutes,  and  this  fact  alone  considerably 
weakened  the  argument  of  the  complainants. 

Another  fact  stated  by  the  Commission  tended  to 
justify  higher  rates  for  the  transportation  of  cowpeas 
even  if  they  had  been  shown  to  have  no  other  use  than 
as  fertilizer.  This  was  the  fact  that  transportation  of 
cowpeas  for  use  as  fertilizer  meant  for  the  railroads  a 
smaller  volume  of  traffic  than  if  they  carried  ordinary 
fertilizers.  The  reason  was  that  cowpeas  are  used  as 
fertilizer  by  being  sowed  and,  after  they  have  grown, 
plowed  under  the  ground.  Therefore,  a  compara- 
tively small  bulk  of  seeds  can  be  used  to  fertilize  a  con- 
siderable area.  In  taking  account  of  this  fact,  the 
Commission  was  deciding  consistently  with  correct 
economic  principle.  For  unless  the  plants  of  the  rail- 
roads concerned  were  already  fully  utilized,  the  roads 
could  well  afford  to  charge  somewhat  lower  rates  per 
ton  mile  and  receive  the  larger  traffic  in  fertilizers 
than  to  charge  somewhat  higher  rates  on  a  smaller 
tonnage  of  cowpeas.  The  greater  traffic,  if  fertilizers 
were  carried,  would  not  involve  proportionately  greater 

1 .4  .  G.  Swaffield  v.  The  A  tlantic  Coast  Line  Railroad  Company  and  The  Louisville 
6*  Nashville  Railroad  Company,  Interstate  Commerce  Reports,  Vol.  X,  pp. 
281-288.     Decided  June  24,  1904. 


284    TRANSPORTATION   COSTS  OF   COMMERCE 

cost  and  it  would  therefore  be  economically  justifiable 
that  the  use  of  fertihzers  should  not  be  discouraged  by  a 
proportionately  higher  rate. 

§2 

Relative  Rates  on  Raw  Material  and  Finished  Product 

In  an  early  case  ^  involving  rates  on  cattle  and  hogs 
as  compared  with  rates  on  their  dressed  products,  the 
Commission  expressed  the  opinion  that  the  rates  on 
these  goods  should  be  proportioned  to  each  other  ac- 
cording to  the  respective  costs  of  service. 

In  the  Export  Rate  case,^  part  of  the  complaint  had 
to  do  with  the  relation  of  rates,  for  export,  on  wheat 
and  on  flour.  The  rates  on  wheat  were  appreciably 
lower,  except  from  Minneapolis,  than  the  rates  on  flour. 
As  a  consequence,  American  millers  at  Chicago  and  St. 
Louis  were  disadvantaged  in  competition  with  foreign 
millers.  It  was  cheaper  to  have  the  wheat  shipped  at 
low  rates,  and  milled  into  flour  abroad,  than  to  have  it 
milled  into  flour  and  then  exported  at  the  higher  rates 
for  flour.  Unless  there  was  difference  in  cost  to  the 
railroads,  no  adequate  economic  justification  could  be 
given  for  this  discrimination.  Such  discrimination  tends 
to  discourage  domestic  milling  even  if  more  efficient 
than  milling  abroad.  The  Commission  expressed  the 
opinion  that  both  public  policy  and  good  railway  policy 
required,  in  general,  like  rates  on  wheat  and  flour,  but 
they  allowed  the  railroads  to  make  a  slight  difference  in 
the  rates.     It  was  claimed  by  the  railways  that  they 

1  Interstate  Commerce  Commission  Reports,  Vol.  IV,  pp.  611-629.  Decided 
April  21,  i8gi. 

*Ibid.,  Vol.  Vin,  pp.  214-276.    Decided  August  7,  1899. 


RULINGS   ON   OTHER   DISCRIMINATION     285 

delivered  flour  over  the  ship's  side  and  wheat  only  at 
the  ship's  side,  and  that  this,  among  other  things,  en- 
titled them  to  make  some  difference  in  the  rates. 

In  a  number  of  cases,  however,  the  Commission  has 
made  decisions  inconsistent  with  the  general  principles 
of  equality  of  rates  on  wheat  and  flour  expressed  in  this 
case.  From  Kansas  and  Missouri  the  rates  on  wheat 
into  Texas  have  long  been  5  cents  lower  per  100  pounds 
than  the  rates  on  flour.  This  tended  to  encourage 
milling  in  Texas  for  Texas  consumption,  and  corre- 
spondingly discouraged  milling  in  Kansas  and  Missouri 
for  the  Texas  market.  On  complaint,  however,  from  the 
milling  interests  of  Missouri,  supported  by  millers  of 
Kansas,  the  Commission  refused  to  order  a  change, 
contending  that  undue  discrimination  had  not  been 
shown. ^  In  this  case  the  Commission  seems  to  have 
been  guided  in  its  decision  by  a  desire  to  protect  the 
vested  interests  of  the  Texas  millers  as  against  their 
rivals  in  Kansas  and  Missouri,  rather  than  by  general 
economic  principles  of  wide  application.  The  same 
complaint  has  been  made  on  later  occasions  with  the 
same  result.- 

In  one  of  the  later  cases,^  brought  by  the  Board  of 
Railroad  Commissioners  of  the  state  of  Kansas,  it  was 
also  complained  that  rates  on  corn  meal  from  points  in 
Kansas  were  7  cents  per  100  pounds  higher  than  rates  on 
corn,  with  the  result  that  shipment  of  corn  meal  into 
Texas  from  Kansas  was  commercially  impossible.  The 
Commission  ruled  that  the  difference  in  cost  of  ser\^ce 
need  not  exceed  3  cents  per  100  pounds  and  that  a  greater 

^  Ibid.,  Vol.  IV,  pp.  417-442.     Decided  November  30,  i8go. 
^  Ibid.,  Vol.  VIII,  pp.  304-31S,  and  Vol.  X,  pp.  35-46. 
*Ibid.,  Vol.  VIII,  pp.  304-315.     Decided  November  i,  1899. 


286    TRANSPORTATION   COSTS   OF   COMMERCE 

difference  in  the  rate,  than  was  required  to  meet  this 
greater  cost,  was  unreasonable.  In  this  case,  the  Com- 
mission's decision,  upholding  a  somewhat  higher  rate  on 
flour  than  on  wheat,  was  based  partly  on  the  fact  that 
the  carriers  in  question  accepted  a  smaller  minimum  car- 
load in  the  case  of  flour,  thus  making  the  per-ton  cost 
of  transportation  somewhat  higher  than  in  the  case  of 
wheat.  In  the  territory  concerned,  this  smaller  minimum 
carload  was  a  convenience  to  dealers.  There  seems  to 
have  been,  therefore,  in  this  case,  a  good  economic 
argument  to  support  the  decision. 

Greater  tonnage  per  carload  may  be  a  reason  for 
making  somewhat  lower  rates  on  raw  material  than  on 
finished  product.  In  one  case,^  it  appeared  that  a  fur- 
niture company  located  at  Lansing,  Mich.,  did  its 
machine  and  bench  work  at  this  point  and  shipped  the 
unfinished  furniture  to  a  station  near  Oakland,  Cal., 
for  completion.  Complaint  was  made  that  the  trans- 
portation charge  on  unfinished  and  on  finished  cheap 
bedroom  sets  was  the  same  and  that  this  discriminated 
against  the  complainant  and  in  favor  of  companies 
shipping  the  completed  furniture  direct  to  market.  It 
was  shown  that  the  railroads  got  a  greater  tonnage  per 
carload  if  they  hauled  the  unfinished  cheap  bedroom 
sets,  making  the  cost  of  hauling  somewhat  less  per  ton ; 
and  this  was  one  reason  why  the  Commission  required 
the  rate  to  be  lower  than  on  the  finished  goods.  The 
Commission  mentioned,  also,  the  greater  value  of  the 
finished  articles,  but  greater  value  alone  would  hardly 
justify,  from  an  economic  point  of  view,  discrimination 
against  finished  goods  as  compared  with  raw  material. 

1  Interstate  Commerce  Commission  Reports,  Vol.  V,  pp.  514-528.  Decided 
December  9,  1892. 


RULINGS   ON   OTHER   DISCRIMINATION     287 

The  relation  between  raw  material  and  finished  product 
may  be  very  close  or  it  may  be  remote.  In  the  case  of 
wheat  and  flour,  it  is  fairly  close.  In  the  case  of  grain 
and  meat,  it  is  comparatively  remote.  To  an  extent, 
grain  is  the  raw  material  of  meat,  since  grain  products 
are  used  as  food  in  fattening  cattle,  hogs,  etc.  But 
live  stock  are  not  fed  entirely  with  grain  nor  is  all  grain 
used  to  feed  live  stock ;  neither  are  they,  except  in  a 
limited  degree,  competitive  commodities.  A  lower  rate 
on  grain  than  on  live  stock,  in  relation  to  cost,  would 
doubtless  in  a  slight  degree  encourage  the  shipment  of 
grain  instead  of  live  stock  or  meat,  from  the  grain- 
producing  centers,  but  this  fact,  while  it  is  not  without 
some  bearing  upon  the  proper  determination  of  the 
relation  of  rates,  cannot,  in  view  of  the  other  facts  above 
stated,  be  considered  alone.  The  Interstate  Commerce 
Commission  has  recognized  ^  that  whether  grain  shall  be 
shipped  to  market,  or  fed  where  it  is  raised,  may  de- 
pend, in  part,  upon  the  relation  of  rates  on  grain  and 
on  live  stock,  and  they  have  expressed  the  opinion 
that  there  ought  to  be,  to  some  extent,  a.  correspondence 
in  the  rates  upon  them. 

§3 

The  Bearing  of  Water  Competition  on  the  Relation  of 
Rates  Charged  for  Carrying  Dijferent  Kinds  of  Goods 

In  the  Pearline  and  common  soap  case,^  to  which 
reference  has  already  been  made,^  the  Commission 
allowed  a  lower  rate  on  common  soap  and  a  greater 

1  Ibid.,  Vol.  VIII,  pp.  158-184.  Date  of  decision  not  given,  but  apparently 
early  in  1899. 

^ Ibid.,  Vol.  I,  pp.  465-479.     Decided  February  15,  1888. 
'  §  I  of  this  Chapter. 


288    TRANSPORTATION   COSTS   OF   COMMERCE 

discrimination  in  its  favor  in  the  case  of  traffic  from 
New  York  to  Atlanta  than  in  the  rest  of  Southern 
Territory.  The  reason  for  this  was  that  between  New 
York  and  Atlanta  water  competition  existed  via  Savan- 
nah. This  water  competition  did  not  affect  Pearline, 
because  Pearline  could  not  so  well  be  exposed  to  the 
dampness  incident  to  water  transportation. 

In  a  complaint  brought  by  the  Merchants'  Union  of 
Spokane  Falls,^  in  the  early  years  of  the  Interstate 
Commerce  Law,  objection  was  made  to  the  lower  rates 
accorded  Pacific  Coast  terminals  than  to  Spokane, 
Wash.  The  Commission  upheld  the  system  in  general, 
because  of  water  competition  at  the  coast,  which  did 
not  apply  to  Spokane ;  but  it  was  pointed  out  that  no 
such  discrimination  could  be  justified  in  favor  of  articles 
which,  without  the  discrimination,  would  still  seek  rail 
rather  than  water  transportation. 

Attention  has  already  been  directed,  in  another  con- 
nection,^ to  the  zone  decision  of  191 1  regarding  dis- 
crimination against  intermountain  territory  in  trans- 
continental rate  making.  The  opening  of  the  Panama 
Canal,  and  the  consequent  greater  cheapness  of  coast  to 
coast  water  transportation,  caused  dissatisfaction  with 
this  order  on  the  part  of  the  railroads,  and  they  en- 
deavored to  have  it  modified.  In  this  endeavor  they 
were  successful.  The  Interstate  Commerce  Commis- 
sion, early  in  1915,  exempted  about  100  commodities, 
as  to  which  water  competition  was  of  peculiar  force, 
from  the  provisions  of  the  191 1  ruling,  allowing  the 
railroads,  in  the  case  of  these  commodities,  to  reduce 

*  Interstate  Commerce  Commission  Reports,  Vol.  V,  pp.  478-513.  Decided 
November  28,  1892. 

*  Chapter  X,  §  8. 


RULINGS   ON  OTHER   DISCRIMINATION     289 

their  terminal  rates  somewhat  further,  without  corre- 
sponding reduction  of  their  rates  to  intermediate  points.^ 
This  decision  has  to  do  partly,  of  course,  with  the  matter 
of  discrimination  between  places.  But  it  has  to  do, 
also  with  discrimination  among  commodities,  since  it 
makes  possible  special  rate  reductions  in  favor  of  those 
goods  most  apt  to  be  carried  by  water. 

For  rulings  of  this  sort,  there  is  not  lacking  economic 
justification.  The  goods  on  which  the  specially  low 
rates  are  made  by  rail  between  the  towns  having  ship 
service  would,  in  any  case,  have  low  rates.  The  rail- 
roads might  refuse  to  carry  them  and,  in  consequence, 
be  unable  to  utilize  their  faciHties  so  completely.  But 
a  difference  in  rates  would  remain.  For  the  railroads 
to  seek  this  traffic  may  mean  fuller  use  of  railroad 
plant  -  without  appreciably  greater  discrimination  than 
would  develop  anyway. 


Value  of  Commodity  in  its  Relation  to  Rates 

In  one  of  its  early  cases,^  the  Commission,  while 
mentioning  the  importance  of  cost  of  service  as  an 
element  in  fixing  transportation  charges,  said  that  cost, 
alone,  was  not  a  controUing  consideration  and  that  the 
value  of  the  service  to  the  property  transported  was  also  an 
essential  factor  to  be  recognized.  If  value  of  service 
is  recognized  because  it  has  a  bearing  on  the  question  of 
"what  the  traffic  will  bear,"  the  economic  propriety  of 

•  See  Interstate  Commerce  Commission  Reports,  Vol.  XXXII,  pp.  6i  1-658. 
Dedded  January  29,  1915. 

»  Cf.  Chapter  VI,  §  3- 

'  Interstate  Commerce  Commission  Reports,  Vol.  Ill,  pp.  473-511.     Decided 
March  14,  i8qo. 
u 


290    TRANSPORTATION   COSTS  OF   COMMERCE 

its  recognition  is  manifest.  In  the  same  way,  value  of 
commodity  may  properly  be  considered  in  connection 
with  rate  regulation,  if  it  is  shown  to  determine,  in  any 
degree,  the  effect  of  various  rates  on  trafi&c.  If  it  is 
possible  to  charge  fairly  high  rates  on  valuable  goods 
without  greatly  decreasing  traffic,  while  cheap  goods 
have  to  be  carried  at  lower  rates  in  order  that  traffic 
shall  be  large  and  facilities  fully  utilized,^  these  facts 
ought  to  be  given  due  weight  by  a  regulating  commis- 
sion. In  a  considerable  number  of  cases,  the  Interstate 
Commerce  Commission  has  mentioned  value  of  com- 
modity among  the  elements  to  be  considered  in  arriving 
at  a  just  rate.  And  the  Com.mission  has  declared  ^  that 
"the  value  of  the  article  is  important,  principally,  be- 
cause of  its  bearing  upon  the  value  to  the  shipper  of  the 
transportation  service"  which  has  always  been  regarded 
by  carriers  as  "one  of  the  important  elements  to  be 
considered  when  fixing  the  rates  to  be  charged  for  trans- 
portation." Apparently  the  expression  "value  of  serv- 
ice," as  here  used,  is  intended  to  have  reference  to 
"what  the  traffic  will  bear." 

§5 

"Devices'^  for  Discrimination  among  Shippers 

We  have  already  seen  ^  that  section  two  of  the  Inter- 
state Commerce  Law  makes  illegal  any  discrimination 
among  shippers  by  means  of  any  special  rate,  rebate, 
drawback,  or  other  device.  The  devices  used  to  give 
discriminating  rates  without  seeming  to  do  so  have  been 
numerous.     For  example,  a  number  of  cases  early  came 

I  Cf.  Chapter  VI,  §  3- 

"Interstate  Commerce  Reports,  Vot  X,  pp.  428-455.  Decided  January  7, 
1905.  '  Chapter  VIII,  §  3- 


RULINGS   ON  OTHER   DISCRIMINATION     291 

before  the  Interstate  Commerce  Commission,  in  which 
it  appeared  that  the  railroads  concerned  furnished  cars 
suitable  for  the  carriage  of  oil  in  barrels,  but  carried  oil 
in  tank  cars  only  for  shippers  who  themselves  owned 
such  cars.  The  railroads  then,  in  addition  to  paying 
rent  to  the  shippers  owning  the  tank  cars,  for  the  use 
of  such  cars  in  carrying  oil,  charged  lower  rates  to  such 
shippers  than  to  those  who  shipped  in  barrels.  The 
Commission  forbade  this  difference  in  rates,  on  the 
ground  that  it  was  the  duty  of  the  transportation  com- 
panies to  furnish  adequate  equipment  for  moving  the 
oil,  and  that  if,  for  various  reasons,  the  carriers  allowed 
shippers  to  provide  such  equipment  for  themselves,  this 
policy  ought  not  to  result  in  higher  relative  rates  to 
those  shippers  who  were  obliged  to  use  or  who  chose 
to  use  the  faciUties  provided  by  the  railroads.^ 

In  the  case  of  Rice,  Robinson  and  Witherop  v.  The 
Western  New  York  and  Pennsylvania  Railroad  Com- 
pany,- the  Commission  again  emphasized  the  duty  of  the 
railroads  to  furnish  necessary  equipment.  It  was  pointed 
out  that  when  a  carrier  chose  to  use  the  cars  of  shippers, 
the  carrier,  in  legal  contemplation,  adopted  them  as  its 
own  for  purposes  of  rates  and  carriage  and  might  not, 
by  any  device,  such  as  payment  of  unreasonable  rent 
for  the  use  of  such  cars,  discriminate  between  shippers. 
The  allow^ance  of  42  gallons  or  of  any  other  number  of 
gallons,  for  leakage,  to  the  shipper  in  tank  cars  without 
a  corresponding  allowance  to  shippers  in  barrels,  was 
declared  to  be  unjust  discrimination  and  unlawful. 
In  this  case,  it  was  also  ruled  that  if  the  tank  used  in 

1  See  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp.  so3-S93i   and 
Vol.  II,  pp.  90-121.     Decided  February  23,  188S,  and  July  ig,  1888. 
^  Ibid.,  Vol.  IV,  pp.  131-157.     Decided  September  5,  1890. 


292    TRANSPORTATION   COSTS   OF   COMMERCE 

carrying  oil  by  tank  cars  was  regarded  as  a  part  of  the 
car  and  its  weight  not  charged  for  in  the  rate,  the  barrels 
also  must  be  so  regarded  and  their  weight  not  charged 
for  to  the  shipper  in  barrels.  On  this  last  point,  the 
rulings  of  the  Commission  have  not  been  in  all  cases 
consistent.^ 

In  another  case,^  it  was  complained  by  George  Rice, 
an  independent  refiner  of  oil,  that  certain  railroads  were 
assuming  a  barrel  of  refined  petroleum  to  weigh  400 
pounds,  while  assuming  a  gallon  to  weigh  6.3  pounds 
when  shipped  in  tanks,  and  that  these  constructive  or 
hypothetical  weights  were  so  far  out  of  proportion  to 
actual  weights  as  seriously  to  discriminate  against  the 
shipper  of  oil  in  barrels.  It  was  also  objected  that  the 
shipper  by  the  tank-car  method  was  allowed  an  arbitrary 
deduction  of  42  gallons  for  leakage,  whereas  no  such 
deduction  was  allowed  in  the  case  of  barrel  shipments. 
Both  of  these  practices,  the  Commission  regarded  as 
indefensible  discrimination. 

Another  "device"  to  make  discriminating  rates  in 
favor  of  some  shippers  and  to  the  disadvantage  of 
others  was  considered  by  the  Commission  in  1904, 
In  the  matter  of  Divisions  of  Joint  Rates  and  Other  Al- 
lowances to  Terminal  Railroads?  The  International 
Harvester  Company  owned  the  capital  stock  of  the 
Illinois  Northern  Railroad  Company  and  a  controlling 
interest  in  the  Chicago,  West  Pullman  &  Southern 
Railroad  Company,  which  operated  as  terminal  con- 
necting roads  in  and  about  Chicago  between  the  plant 
of  the  Harvester  Company  and  various  industries  and 

1  See,  for  example,  Interstate  Commerce  Commission  Reports,  Vol.  I,  pp. 
503-593-     Decifled  February  23,  1888. 

^  Ibid.,  Vol.  V,  pp.  193-233.     Decided  April  9,  1892. 

'  Ibid.,  Vol.  X,  pp.  385-404.     Decided  November  3,  1904. 


RULINGS  ON   OTHER   DISCRIMINATION     293 

railroads.  Until  shortly  before  the  matter  was  con- 
sidered by  the  Commission,  these  terminal  railroads 
had  received  switching  charges  amounting  to  from  $1 
to  $3.50  per  car.  They  had  more  recently,  however, 
arranged  with  the  railroads  for  a  division  of  the  through 
rate,  which  often  amounted  to  $12  per  car.  The  new 
arrangement  was  declared  by  the  Commission  to  be 
unlawful  prejudice  in  favor  of  the  International  Harves- 
ter Company.  Something  of  the  same  arrangement 
was  found  to  exist  in  favor  of  the  Illinois  Steel  Com- 
pany, a  subsidiary  of  the  United  States  Steel  Corpora- 
tion, and  was  ordered  corrected. 

In  a  more  recent  case  ^  it  appeared  that  certain  rail- 
roads transporting  coal  from  coal  mines  upon  their 
lines  were,  during  a  part  of  the  year,  unable  to  furnish 
all  the  coal  cars  needed.  Some  of  the  mining  companies 
owned  their  own  cars,  for  the  use  of  which  the  railroads 
paid  them  a  rental,  and  the  question  arose  whether 
these  cars  should  be  counted  with  the  rest  in  making 
proportionate  allotments  (according  to  capacity  of  mines) 
to  the  different  mining  companies,  or  whether  the  min- 
ing companies  which  owned  cars  should  be  entitled  to 
the  use  of  these  cars  and,  in  addition,  to  as  large  a  share 
of  the  railway  cars  as  if  they  had  none  of  their  own. 
The  railroads  had  been  following  this  latter  plan.  The 
Commission  ruled  that  these  "private"  or  mine-owned 
or  leased  cars  must  be  counted  with  the  cars  owned  by 
the  railroads  in  determining  the  distribution.  A  mining 
company  owning  such  "private"  cars  might  properly 
receive  its  own  cars,  but  might  not  receive  more  than 
these  unless  more  were  required  to  give  such  a  company 
its  proportionate  share. 

» Ibid..  Vol.  XII,  pp.  308-410.     Decided  July  ii,  1907. 


294    TRANSPORTATION   COSTS   OF   COMMERCE 

Without  attempting  to  discuss  all  possible  arguments 
bearing  upon  the  expediency  and  justice  of  such  a 
decision,  we  may  profitably  give  attention  to  two  im- 
portant considerations.  In  the  first  place,  it  seems 
likely  that  a  decision  upholding  the  previous  practice 
of  the  railroads  in  question  would  have  tended  to  give 
very  great  advantage  to  those  mining  companies  which 
were  in  a  position  to  provide  their  own  equipment,  and 
would  have  given  them  such  advantage  without  regard 
to  their  relative  efiiciency  in  their  business  of  mining 
coal.  Such  a  decision  would  have  made  it  easy  for 
railroads  endeavoring  to  do  so  to  ruin  completely  such 
mining  companies  as  were  unable  to  own  cars.  It  would 
merely  be  necessary  for  the  railroads,  frequently  or  con- 
tinually, to  have  a  shortage  of  coal  cars,  so  that  com- 
panies relying  upon  the  railroads  for  cars  would  be  un- 
able to  fill  their  contracts,  and  so  that  the  car-owning 
companies  favored  should  be  able  gradually  to  take  all 
the  business.  And  such  a  result  might  be  brought  about 
by  secret  conspiracy  between  the  favored  mining  com- 
panies and  the  railroads.  But  it  is  part  of  the  proper 
business  of  the  railroads,  as  common  carriers,  to  furnish 
the  equipment  required  for  the  movement  of  freight. 
If,  instead  of  themselves  providing  the  entire  amount 
of  rolling  stock  which  may  reasonably  be  regarded  as 
essential,  railroad  companies  allow  shippers  to  provide 
part  of  it,  the  principal  loss  due  to  shortage  ought 
not  to  fall  upon  shippers  whose  only  offense  is  that  they 
have  not  done  or  cannot  do  what  it  is  the  business  of 
the  railroads  to  do. 

In  the  second  place,  it  must  be  remembered  that  the 
cars  provided  by  some  shippers  for  their  own  use  are, 
nevertheless,  leased  by  the  railroads.     The  railroads  pay 


RULINGS   ON  OTHER  DISCRIMINATION     295 

rent  for  these  cars  while  the  cars  are  in  use  by  the  rail- 
roads. This  rent,  presumably,  compensates  the  shippers 
for  depreciation,  and  yields  a  fair  return  on  their  cost. 
Such  shippers  are  not,  therefore,  deprived  of  all  gain 
from  their  ownership  of  cars,  merely  because  the  rail- 
roads must  assign  railroad-owned  cars  more  largely  to 
shippers  who  have  no  "private"  cars.  And  since  the 
railroads  pay  rent  for  the  use  of  the  "private"  cars, 
these  are,  for  the  time  being,  leased  cars.  Hence,  it 
may  be  reasonably  contended  that  such  cars  should  be 
counted  with  the  others  in  making  car  allotments, 
and  that  their  owners  are  given  ample  consideration 
in  being  certain  that  these  cars,  at  least,  shall  be  as- 
signed to  them,  and  in  receiving  a  fair  rent  for  their  use. 

Complaint  was  also  made  that  foreign  railway  fuel 
cars  were  not  counted  as  part  of  the  allotment  of  mines 
to  which  they  were  sent.  These  were  cars  of  railways, 
other  than  those  on  which  the  mines  were  situated,  which 
were  purchasing  coal  for  their  own  use.  The  Commis- 
sion ruled  that  such  cars  should  be  counted  with  the 
others.^ 

In  another  case,^  the  complainants  made  objection, 
also,  to  the  defendants'  practice  of  not  counting  their 
own  cars  used  for  fuel  as  part  of  the  allotment  of  a  com- 
pany receiving  such  cars.  The  defendants  claimed  the 
right  to  make  private  contracts  for  necessary  fuel  and 
asserted  that  they  could  make  more  advantageous 
contracts  if  not  obliged  to  count  their  own  fuel  cars  as 

*  The  jurisdiction  of  the  Interstate  Commerce  Commission  in  cases  of  this 
sort,  and  its  authority  to  make  such  rulings,  was  upheld  by  the  Supreme  Court 
in  Interstate  Commerce  Commission  v.  Illinois  Central  Railroad  Company,  215 
U.S.,  452- 

*  Interstate  Commerce  Commission  Reports,  Vol.  XIII,  pp.  451-459.  De- 
cided April  13,  1908. 


296    TRANSPORTATION   COSTS  OF  COMMERCE 

part  of  any  allotment.  The  Commission  adhered  to  its 
former  ruling  in  the  case  of  privately  owned  cars  and 
foreign  railway  fuel  cars  but  held  that  the  defendants 
need  not  count  their  own  fuel  cars  against  the  mines  to 
which  they  were  hauled  for  fuel. 

In  the  case  of  Armour  Car  Lines  v.  Southern  Pacific 
Company,^  decided  in  1910,  it  was  complained  that 
defendants' $3  per  ton  rate,  applied  up  to  August  4,  1907, 
for  the  transportation  of  ice  in  carloads  from  Los  Angeles, 
Cal.,  to  Yuma,  Ariz.,  was  unreasonable  by  its  excess 
over  the  $1.90  rate  thereafter  charged.  The  Commis- 
sion was  asked  to  order  reparation  (since  it  may  order 
refund  of  excess  above  a  reasonable  rate  as  well  as  pre- 
scribe a  reasonable  rate  for  the  future)  for  the  alleged 
overcharge  on  shipments  which  had  moved  at  the  higher 
rate.  The  defendant  had  promised  a  reduction  at  an 
earlier  date  but  had  delayed  carrying  its  promise  into 
effect.  Counsel  for  complainant  stated  that  com- 
plainants' contract  for  supplying  ice  to  the  railway 
had  been  made  in  view  of  the  promised  $1.90  rate.  The 
Commission  expressed  the  opinion,  however,  that  "to 
sanction  as  a  just  basis  for  reparation  the  private  under- 
standing prior  to  the  shipments  the  rate  remaining  un- 
changed until  the  shipments  were  made,  would  be  to 
establish  a  precedent  for  the  grossest  discrimination  and 
favoritism."  Apparently  to  anticipate  such  an  objec- 
tion, it  was  testified  that  no  other  manufacturer  or  pro- 
ducer of  ice  in  CaHfornia  could  have  entered  into  such 
a  contract  as  had  the  complainant,  because  no  other 
company  was  in  possession  of  cars  and  other  facilities 
for  the  transportation  of  ice  as  needed  by  the  railroad. 

» Interstate  Commerce  Commission  Reports,  Vol.  XVII,  pp.  461-463.    De- 
cided January  3,  1910. 


RULINGS  ON  OTHER   DISCRIMINATION     297 

But  this  contention,  in  the  view  of  the  Commission,  did 
not  meet  the  objection  to  the  precedent  of  reparation 
in  such  a  case.  It  was  pointed  out  that  even  if  the  rail- 
road had  reduced  its  rate  according  to  agreement,  the 
complainant  would  thereby  have  had  an  advantage  of 
exclusive  knowledge  over  any  competitors  if  there  were 
any.  "Midnight  tariffs"  could  have  afforded  no  better 
opportunity  for  discrimination  than  practices  of  this 
sort.  Furthermore,  if  such  transactions  were  to  be 
justified  in  particular  instances  on  the  theory  that  the 
favored  company  had  a  monopoly  of  the  traffic  in  ques- 
tion, so  that  there  was  no  rival  to  injure,  then  the  Inter- 
state Commerce  Commission  would  in  many  cases  be 
led  into  an  interminable,  unsatisfactory,  and  often  en- 
tirely vain  inquiry  to  determine  if  any  one  had  been 
disadvantaged.  The  Commission,  accordingly,  refused 
to  order  reparation,  and  dismissed  the  complaint. 

§6 

Summary 

We  have  seen  that  the  ruHngs  of  the  Interstate  Com- 
merce Commission  regarding  relative  rates  on  substitute 
goods  and  on  goods  which  stand  to  each  other  in  the 
relation  of  raw  material  and  finished  product  arc,  for 
the  most  part,  consistent  with  the  economic  principle 
that,  in  those  cases  particularly,  discrimination  should 
be  reduced  to  a  minimum.  Since  most  substitutes  are 
only  partial  substitutes,  and  since  most  raw  materials 
either  require  other  goods  to  be  joined  with  them  in 
producing  any  particular  finished  product,  or  are  them- 
selves largely  otherwise  used,  or  both,  it  is  not  often 
possible  to  make  out  a  good  case  against  a  limited  degree 


298    TRANSPORTATION   COSTS   OF   COMMERCE 

of  discrimination.  Goods  in  the  transportation  of  which 
the  raihoads  have  to  meet  water  competition,  the  Com- 
mission allows  to  be  carried  on  the  railroads,  where 
water  competition  is  to  be  feared,  at  relatively  low 
rates.  For  this,  there  is  economic  justification.  The 
Commission  has  also  recognized  that,  in  general,  valu- 
able goods  will  bear  relatively  high  rates,  while  cheap 
goods  must  be  carried  at  lower  rates  in  comparison  with 
cost  of  service. 

Various  devices  to  give  especially  advantageous  rates 
to  favored  shippers  were  mentioned,  and  the  adverse 
rulings  of  the  Interstate  Commerce  Commission  set 
forth  and  discussed.  In  general,  these  ruhngs,  though 
they  may  not  always  commend  themselves  to  us  at  first 
glance,  appear  on  further  analysis  to  be  sound  and,  in 
the  majority  of  cases,  necessary. 


CHAPTER  XII 

Uneconomical  Government  Interference  with, 
AND  Encouragement  of,  Transportation 

§1 

Navigation  Laws 

One  of  the  important  methods  which  govermnents 
have  sometimes  followed,  in  order  to  develop  a  national 
mercantile  marine,  has  been  the  method  of  navigation 
acts,  excluding  foreign  vessels  from  certain  designated 
commerce.  For  example,  England's  navigation  acts  of 
1646  to  1660  (act  of  1651  perhaps  of  chief  importance) 
prohibited  the  importation  of  any  goods  into  England  or 
Ireland  or  any  of  the  British  colonies,  except  in  British 
ships,  owned  and  navigated  by  British  subjects,  or  in 
ships  of  the  country  where  the  goods  were  produced; 
also  these  laws  prohibited  the  export  to  foreign  ports  of 
any  goods  produced  in  the  American  colonies,  except 
in  British  ships.'  Our  own  Federal  law  regarding  the 
coasting  trade  is  of  the  same  genus.  This  law  requires 
that  ''no  merchandise  shall  be  transported  by  water, 
under  penalty  of  forfeiture  thereof,  from  one  port  of  the 
United  States  to  another  port  of  the  United  States,  either 
directly  or  via  a  foreign  port,  or  for  any  part  of  the  voyage, 
in  any  other  vessel  than  a  vessel  of  the  United  States."  ^ 

•  See  Lindsay,  Uislory  of  Mcnhant  Shipping,LQndon  (Low,  Low  and  Searle), 

1847,  Vol.  n,  pp.  182-189. 

'  30  Stat.  L.  ch.  26,  p.  248.  Referred  to  in  the  Report  of  the  Commissioner 
of  Corporations,  on  Transportation  by  Water  in  the  United  States,  Part  I,  1909, 

299 


300    TRANSPORTATION   COSTS   OF   COMMERCE 

Such  navigation  acts  are  closely  analogous  to  protec- 
tive tariffs.  Like  protection,  they  develop  the  favored 
home  industry  by  excluding  foreign  competition,  not, 
as  in  the  case  of  the  bounty,  by  providing  funds  to  help 
meet  this  competition.  Like  protection,  these  laws  can 
do  no  more  than  guarantee  home  patronage ;  they  can- 
not insure  successful  invasions  of  other  commerce,  de- 
pendent solely  on  foreign  patronage.  As  with  protec- 
tion, the  burden  of  these  laws  rests  upon  consumers  (of 
goods  carried  in  the  protected  ships),  rather  than  upon 
taxpayers  as  such.  The  burden  rests  upon  consumers, 
because  the  exclusion  from  the  designated  commerce,  of 
ships  presumably  able  to  carry  goods  more  cheaply  than 
the  favored  domestic  ships,'  tends  towards  high  trans- 
portation rates,  and,  therefore,  towards  higher  prices 
to  consumers,  of  goods  carried,  or  towards  decrease  of 
domestic  commerce,  or  both.  The  burden  of  such  a 
poUcy  may  not  be  equally  distributed  over  a  country 
enforcing  it,  but  may  rest  with  especial  weight  upon  those 
sections  of  the  country  which,  being  on  or  near  the  coast 
line,  have  most  to  gain  from  cheap  water  transportation. 
A  navigation  poHcy  hke  that  estabhshed  by  the  historic 
navigation  laws  of  England,  above  mentioned,  may  also 
tend,  by  increasing  transportation  costs,  to  limit  the  ex- 
port trade  of  the  country  adopting  such  a  policy.  Only 
in  case  other  countries  have  no  available  alternative 
source  of  supply  for  goods  desired,  can  the  extra  cost  of 


pp.  ii8,  lip.  Since  the  above  was  written,  Congress  has  passed  a  law  (August, 
1914)  admitting  foreign-built  ships  to  American  registry  if  owned  or  purchased 
by  Americans  (See  New  York  World,  August  18,  1914).  Such  vessels  were  not 
previously  ranked  as  American  and  had  to  sail  under  alien  flags.  But  the  new 
law  does  not  permit  foreign-built  ships  to  engage  in  the  coasting  trade. 

>  If  the  latter  carried  goods  more  cheaply,  they  could  drive  out  foreign  rivals 
without  legal  aid. 


ENCOURAGEMENT  OF  TRANSPORTATION     301 

carrying  these  goods  rest  as  a  burden  on  the  consumers 
of  those  other  countries. 

The  main  argument  against  navigation  laws  is  the  same 
as  that  against  protection.     Like  protection,  it  diverts 
labor  and  capital  from  lines  which  they  would  otherwise 
follow,  into  relatively  unprofitable  lines.     These  laws  are, 
therefore,  as  indefensible,  economically,  as  are  protective 
tariffs.     Where    navigation    laws    would    be    hkely    to 
develop  a  national  marine,  able,  eventually,  to  compete 
in  the  world's  commerce  successfully  without  aid,  there 
is  a  reasonable  probabihty  that  conditions  are  favorable 
to  this  success  and  that  it  would  be  attained  in  time 
without  government  coddling.     Where,  in  spite  of  navi- 
gation laws  intended  to  develop  a  national  marine,  ability 
to   compete   outside   of   the   protected   hmits   is   never 
attained,    the    protective    laws    involve    a    continuous 
burden  on  the  general  public.     Whatever  military  justi- 
fication may  exist  for  such  protection  to  national  navi- 
gation, economic  justification  is  usually  absent,  and  is 
probably  always  of  doubtful  weight. 


Subsidies  to  Native  Shipping 

Another  method  of  encouraging  a  national  mercantile 
marine  is  that  of  paying  so-called  shipping  subsidies. 
Shipping  subsidies  are  simply  bounties  paid  to  the  ship- 
ping industry.  What  has  been  said  elsewhere  ^  re- 
garding bounties  applies,  therefore,  to  shipping  subsidies. 
Like  bounties  and  like  protective  tariffs,  shipping  sub- 
sidies divert  national  industry  out  of  its  natural  lines 
into    a    line    which,    without    such    encouragement,    it 

•Part  II,  Chapter  Vn. 


302    TRANSPORTATION   COSTS  OF   COMMERCE 

probably  would  not  follow,  or  which  it  would  not  follow 
to  the  same  extent.  Unlike  protection,  subsidies  do 
not  exclude  foreign  competition,  but  simply  endeavor, 
by  money  payments,  to  make  it  possible  for  the  national 
marine  to  meet  this  competition.  As  with  other  boun- 
ties, therefore,  the  burden  falls  upon  taxpayers,  rather 
than  upon  shippers  or  ultimate  consumers.  The  two 
last  classes  may  even  gain  somewhat,  if  a  subsidy  is 
sufficient  to  cause  lower  freight  rates  in  spite  of  the 
greater  cost  of  transportation  in  native  ships.  But 
even  these  classes  will  gain  nothing  if  a  subsidy  is  just 
high  enough  to  enable  native  ships,  previously  unable  to 
compete,  to  charge  rates  no  higher  (and  no  lower)  than 
those  charged  by  foreign  ships. 

One  of  the  cruder  arguments  for  subsidies,  as  for  pro- 
tective tariffs,  is  to  the  effect  that  when  we  patronize 
foreign  vessels  we  have  to  send  our  money  abroad,  and 
that  we  would  "save"  this  money  if  we  carried  the 
freight  in  our  own  vessels.  As  a  matter  of  fact,  money 
is  not  the  one  thing  for  which  trade,  in  the  last  analysis, 
is  carried  on.  Furthermore,  if  money  flows  out  unduly, 
it  thereupon  begins  to  flow  back  again,  in  accordance 
with  the  principles  which  we  have  so  often  set  forth  in 
the  discussion  of  other  problems  of  commerce.^  As  re- 
gards the  most  economical  directions  of  industrial  and 
commercial  development,  it  should  be  apparent  that  if 
British  or  other  ships  can  carry  goods  more  cheaply  than 
our  own  merchant  marine,  then  our  labor  may  better  be 
devoted  to  the  lines  where  it  yields  greater  returns,  to 
services  which  others  cannot  so  well  perform  for  us,  to 
our  factories,  farms,  mines,  and  railroads.  If  American 
labor  is  more  profitable  when  devoted,  for  instance,  to 

'  See,  for  example,  Part  I,  Chapter  V,  §§  6,  7,  8. 


ENCOURAGEMENT  OF  TRANSPORTATION     303 

the  running  of  railroad  trains,  then  it  is  poor  economic 
policy  to  draw  it,  by  subsidies,  into  the  running  of  ships. 

Another  argument  for  subsidies  is  based  on  the  asser- 
tion that  "  trade  follows  the  flag."  This  assertion,  used 
in  relation  to  subsidies,  suggests  that  a  national  merchant 
marine  acts  as  a  species  of  advertisement ;  that,  for  ex- 
ample, the  American  flag  flying  at  the  mast  head  of  a 
merchant  ship  will  stimulate  a  desire  in  South  America 
or  elsewhere,  to  examine,  and,  therefore,  eventually  to 
buy,  American  goods.  Except  for  purposes  of  adver- 
tisement, foreign  ships  serve  as  well  to  carry  American 
goods  to  market  as  do  American  ships,  and  better  in 
proportion  as  they  carry  these  goods  more  cheaply. 

Probably  there  is  some  advertisement  for  a  country's 
goods  in  the  ubiquitousness  of  its  merchant  ships.  Yet 
we  must  beware  of  exaggerating  the  amount  and  the 
value  of  this  advertisement,  and  of  overlooking  its  cost. 
France  has  made  considerable  effort  to  develop  shipping 
and  has  hoped  thereby  to  develop  foreign  commerce, 
while  the  United  States  has  done  almost  nothing  to  stimu- 
late foreign  trade  in  American  ships ;  yet  a  practically 
stationary  foreign  commerce  of  the  former  country  has 
been  contemporaneous  with  an  extensive  growth  of  the 
commerce  of  the  latter.^  *'The  history  of  the  world's 
commerce  seems  to  show  conclusively  that  the  nation- 
ality of  ship  owners  is  quite  a  secondary  matter  in  the 
development  of  trade."  - 

So  far  as  the  presence  of  a  nation's  ships,  e.g.  American 
ships,  on  the  high  seas  and  in  foreign  harbors  really  tends 
by  its  advertisement  to  stimulate  American  export 
trade,  it  would  seem  that  the  persons  having  to  pay  for 

•  Meeker,  History  of  Shipping  Subsidies  (in  publications  of  the  American 
Economic  Association,  August,  1905),  p.  213.  ^  Ibid. 


304    TR.'VNSPORTATION   COSTS   OF   COMMERCE 

this  advertisement  should  be  those  who  expected  to 
reap  special  gain  from  it.  Why  should  not  merchants 
and  manufacturers  who  are  interested  in  exploiting  the 
trade  of  any  part  of  the  world,  and  who  seriously  think 
that  the  presence  there  of  vessels  flying  the  American 
flag  will  bring  them  a  larger  market,  be  wilhng  to  sub- 
scribe to  the  stock  of  American  hnes,  or  pay  a  Httle 
extra  to  have  their  goods  carried  in  American  vessels,  or 
both?  Is  it  not  possible  that  American  merchants  and 
manufacturers  will  not  do  this  to  any  great  extent,  be- 
cause the  gain  would  be  so  small  as  not  to  equal  the  cost?  , 
Hard-headed  business  men  spend  a  great  deal  of  money 
in  advertising.  Some  of  them  are  enthusiastic  over  the 
assumed  gains  of  this  particular  kind  of  advertising  if  it 
is  proposed  that  it  shall  be  done  at  public  expense  by 
means  of  subsidies.  But  would  they  consider  the  rather 
problematical  results  of  such  indirect  and  indefinite 
advertising  worth  paying  for  out  of  their  own  business 
profits?  By  the  subsidy  method,  many  persons  and 
many  sections  of  the  country  are  taxed  to  secure  results 
which  may  be  of  little  or  no  benefit  to  them  and  which 
are  probably  of  not  very  much  benefit  to  any  one. 

Another  argument  in  favor  of  subsidies  is  one  that 
corresponds  to  the  infant  industry  argument  for  protec- 
tion. It  is  urged,  in  this  view,  that  subsidies  should 
be  given  to  divert  industrial  and  commercial  activity 
more  largely  into  shipping,  in  the  hope  that  the  mer- 
chant marine  will  develop  in  efficiency  until  it  is  able  to 
stand  alone.  An  important  counter-argument  is  the  fact 
that  no  one  is  able  to  foresee  with  any  certainty  whether 
or  not  the  shipping  industry  ever  can  stand  alone  and 
that  legislators  are  less  likely  to  risk  the  public  wealth 
wisely  than  business  men  are  to  risk  their  own.     There 


ENCOURAGEMENT  OF  TRANSPORTATION    305 

is  great  danger  that  subsidies,  once  started,  would  con- 
tinue indefinitely  on  the  plea  that  they  continued  to  be 
necessary.'  And  if,  as  a  consequence  of  a  subsidy  sys- 
tem, the  national  mercantile  marine  should  become 
larger,  though  at  the  general  expense,  then  the  political 
pressure  to  maintain  the  subsidy  system  would  very 
probably  become  greater.  It  is  altogether  too  probable 
that  if  the  giving  of  subsidies  is  generally  recognized  as 
a  proper  function  of  government,  men  who  would  other- 
wise devote  themselves  to  planning  improvements,  and  to 
seeking  real  progress  in  efficiency,  will  instead  devote 
themselves  to  influencing  political  action,  in  order  that 
they  may  get,  or  maintain,  or  increase,  a  subsidy.^ 
This  method  of  acquiring  gain  is  not  consistent  with  the 
ideal  of  industrial  and  commercial  morality.  Industry 
and  commerce  should  be  so  organized  that  profits  will  be 
made  only  by  serving  the  public,  and  that  profits  will  be 
large  to  any  person  or  firm  in  proportion  as  that  person 
or  firm  serves  the  public  well.  The  prosperity  of  those 
engaged  in  operating  a  nation's  merchant  marine  ought 
not  to  be  made  dependent  upon  their  poUtical  influence 
rather  than  upon  their  economic  service. 

Apart  from  purely  economic  considerations,  shipping 
subsidies  are  sometimes  urged  as  a  means  of  increasing 
a  nation's  naval  strength.  Two  principal  naval  reasons 
are  commonly  given  for  the  maintenance  of  a  merchant 
marine,  even  at  the  expense  of  a  subsidy.  The  first  is 
the  desirability  of  having  a  "naval  reserve"  made  up  of 
large  and  swift  merchant  steamers  suitable  for  conver- 
sion into  cruisers,  colliers,  and  transports,  should  need 
for  such  arise.     As  a  matter  of  fact,  it  is  only  as  colUers 

>  Meeker,  History  of  Shipping  Subsidies,  p.  8i. 
*  Ibid.,  p.  2i6. 


3o6    TRANSPORTATION   COSTS  OF  COMMERCE 

and  transports  that  such  vessels  are  likely  to  be  useful, 
since  ships  of  war  are  nowadays  highly  specialized,  and 
merchant  vessels  cannot,  economically,  be  made  over 
into  cruisers.^  The  second  reason  is  the  desirability  of 
having  experienced  seamen  from  whom  to  recruit  colliers, 
transports,  and  additional  fighting  ships  when  war 
threatens,  to  replace  those  killed  and  wounded,  to  hold 
captured  vessels,  etc. 

These  objects  may  be  perfectly  justifiable,  even  laud- 
able, in  themselves.  And  it  may  be  cheaper  to  pay  sub- 
sidies to  certain  lines,  thus  helping  to  keep  them  in  ships 
and  men  capable  of  emergency  use  by  government,  but 
letting  them  be  mainly  supported  by  commerce,  than  to 
support,  continuously,  and  wholly  at  pubHc  expense,  a 
larger  naval  force.  But  if  the  policy  of  subsidizing  ships 
appears  necessary  to  us  for  military  reasons,  we  should 
frankly  recognize  that  this  policy  involves  an  economic 
loss,  that  it  is  an  expense  borne  for  the  same  purpose  as 
the  expense  of  maintaining  a  navy.  We  should  not 
deceive  ourselves  into  the  belief  that  the  subsidizing  of 
ocean  navigation  is  an  economically  profitable  policy. 
We  should  therefore  aim  to  get  the  largest  mihtary  result 
possible  at  the  smallest  possible  cost.  Large  payments 
to  swift  mail  lines  and  possibly  to  certain  other  ships 
constructed  for  speed  and  carrying  capacity  and  con- 
forming, in  other  ways,  to  possible  emergency  require- 
ments mark  the  limit  beyond  which  we  should  not  go 
in  subsidizing,  even  if  we  should  go  so  far.  Subsidies 
granted  according  to  these  principles  are  payments  for 
certain  definite  services  or  potential  services,  and  are 
not  to  be  classed  with  subsidies  granted  for  purely  com- 
mercial reasons. 

*  Meeker,  History  of  Shipping  Subsidies,  p.  215. 


ENCOURAGEMENT  OF   TRANSPORTATION    307 

§3 
Government  Operation  of  Merchant  Ships 

During  the  last  several  months,  considerable  effort 
has  been  made  to  bring  into  public  favor,  in  the  United 
States,  and  to  get  through  Congress,  a  plan  for  the  Federal 
purchase  and  operation  of  merchant  ships  to  engage  in 
foreign  trade.  A  bill  for  the  carrying  out  of  the  plan 
failed  of  passage  in  the  last  session  of  Congress,  but  at 
present  writing  (November,  191 5)  there  seems  reason  to 
suppose  that  a  new  bill,  embodying  substantially  the 
same  provisions,  will  be  presented  during  the  coming 
session.  The  proposed  new  bill,  as  recently  outlined 
by  Secretary  of  the  Treasury  William  G.  McAdoo,^ 
contemplates  an  appropriation  of  $50,000,000,  and  the 
establishment  of  a  shipping  board  to  supervise  its  ex- 
penditure and  to  have  permanent  control  of  the  govern- 
ment's investment.  This  shipping  board  is  to  consist  of 
the  Secretary  of  the  Navy  and  the  Secretary  of  Com- 
merce, ex-ofiicio  members,  and  three  members  who  shall 
be  appointed  by  the  President  with  the  consent  of  the 
Senate.  The  board  is  to  be  empowered  to  organize  a 
corporation  or  corporations,  to  subscribe  in  whole  or  in 
part  to  the  stock  issued,  and  to  vote  the  stock  of  the 
United  States  in  the  election  of  directors.  The  proposed 
scheme  is,  therefore,  a  scheme  for  goverrmient  owner- 
ship and  operation  of  ships,  through  the  intermediation 
of  one  or  more  corporations. 

Among  the  purely  economic  arguments  for  this  meas- 
ure, it  is  urged  that  the  government  may  make  a  profit 
out  of  the  business ;   that  even  if  the  ships  are  operated 

*At  Indianapolis,  Ind.,  October  13,  1915.  See  The  Journal  of  Commerce 
and  Commercial  Bulletin,  New  York,  October  14,  1915. 


3o8    TRANSPORTATION   COSTS  OF   COMMERCE 

at  a  loss,  it  will  be  worth  while  for  the  sake  of  develop- 
ing American  commerce,  e.g.  with  South  America  and 
Asia ;  and  that  American  shippers  may  thus  be  pro- 
tected against  the  exorbitant  rates  which  private  com- 
panies might  charge  and  which,  owing  to  the  scarcity  of 
merchant  shipping  service  caused  by  the  present  war, 
it  is  asserted  they  are  charging. 

It  is  not  likely,  however,  that  goverrmient  operation 
can  succeed  better,  if,  indeed,  it  can  succeed  so  well, 
from  a  financial  viewpoint,  as  operation  by  private 
companies ;  and  it  is  entirely  possible  that  the  hoped-for 
profits  might  prove  to  be  substantial  losses,  as  often 
occurs  in  private  business.  Still  less  may  we  assume 
that  anticipated  commerce  which  can  only  be  developed 
and,  perhaps,  only  maintained,  by  transportation  in 
government-owned  (or  otherwise  subsidized)  ships  at 
less  than  cost,  and  therefore,  at  the  expense  of  the  tax- 
paying  public,  is  worth  while.  Nor,  thirdly,  is  it  to  be 
uncritically  concluded  that  rates  would  be  more  effec- 
tively regulated  and  shippers  better  protected  by  gov- 
ernment competition  with  private  companies,  than  they 
could  be  by  such  further  extension  of  direct  regulation 
as  experience  may  show  to  be  desirable.  The  temporary 
scarcity  of  ships  would  not  be  relieved  by  the  fact  that 
some  of  the  ships  were  owned  by  the  government.  And 
it  is  by  no  means  certain  that  the  government's  building 
policy  would  more  wisely  adjust  the  number  of  ships  to 
the  need  for  them  than  the  building  policy  of  private 
companies. 

Another  argument  has  been  advanced  in  favor  of  the 
measure,  which,  although  owing  its  vahdity  to  the  pos- 
sible interference  of  foreign  wars  with  American  trade, 
is,  in  a  sense,  an  economic  argument.     This  is  that  re- 


ENCOURAGEMENT  OF  TRANSPORTATION     309 

liance  upon  the  merchant  marines  of  foreign  countries 
leaves  us  relatively  helpless  when,  these  countries  being 
engaged  in  war,  their  merchant  ships  are  liable  both  to 
capture  by  enemy  war  vessels  and  to  commandeering 
as  transports,  colliers,  etc.,  by  their  own  governments. 
If,  therefore,  an  American  merchant  fleet  is  securable 
only  at  the  exj^ense  of  American  taxpayers,  the  taxes 
paid  during  ordinary  times  to  make  good  its  losses  may 
be  regarded  as  insurance  premiums  against  a  time  when 
such  a  fleet  might  be  our  sole  rehance  for  trade.  It  is 
fairly  open  to  question,  however,  whether  any  reason- 
ably probable  conditions  would  justify  such  premiums 
in  the  form  of  subsidized  government  (or  private)  navi- 
gation lines,  unless  the  necessary  subsidy  were  so  small 
as  not  to  be  an  appreciable  burden. 

It  ought  to  be  said,  however,  in  fairness  to  the  advo- 
cates of  the  measure  under  discussion,  that  their  support 
of  it  rests  partly  on  asserted  advantages  of  greater  naval 
strength.  The  importance  of  auxiliary  vessels  in  time 
of  war  is  emphasized  and,  no  less,  the  importance  of 
having  trained  Ajnerican  officers  and  seamen,  willing  to 
fight  for  the  United  States,  who  may  be  availed  of  in 
possible  emergency.  From  a  purely  military  point  of 
view,  it  may  be  that  a  government-owned  line  or  lines 
of  ships,  which  should  consider  naval  requirements  first 
and  commercial  requirements  only  incidentally,  would 
have  some  advantages  over  subsidized  private  lines 
which  would  consider  naval  requirements  only  to  the 
extent  specified  by  government  as  a  condition  of  receiv- 
ing a  subsidy.  Certainly,  too,  such  a  government  line 
might  better  engage  in  trade,  even  at  a  loss,  than  be 
wholly  supf>orted  by  the  tax  fund.  But  purely  miUtary 
or  naval  considerations  can  hardly  be  urged  in  favor  of 


3IO    TRANSPORTATION   COSTS   OF   COMMERCE 

the  acquisition  by  government  of  more  or  different 
ships  than  are  reasonably  necessitated  by  naval  require- 
ments. 

§4 

Indirect  Subsidies,  Favoring  Native  Ships  as  Compared 
with  Foreign  Ships 

A  country  may  try  to  extend  and  develop  its  own 
merchant  marine,  to  the  consequent  decrease  (or  slower 
increase)  of  the  number  of  foreign  ships,  by  indirect  as 
well  as  by  direct  subsidies.  Any  service  which  a  coun- 
try, through  its  goverrmient,  performs  for  its  own  ships 
without  pay,  while  charging  foreign  vessels  for  it,  is 
equivalent  to  a  money  subsidy. 

Were  it  not  for  clear  treaty  obHgations,  there  would 
probably  be,  in  the  United  States,  as  strong  a  demand 
for  free  use  of  the  Panama  Canal  by  all  of  our  American 
merchant  ships,  as  there  has  actually  been  for  its  free 
use  by  American  vessels  engaged  in  the  coasting  trade. ^ 
To  let  American  vessels  use  the  Panama  Canal  free  would 
be  equivalent  to  a  money  subsidy,  because  it  would 
amount  to  the  same  thing  as  to  make  a  charge  for  the 
use  of  the  canal  and  then  to  make  a  payment  equaling 
this  charge,  to  American  shipping  interests.  In  either 
case,  the  taxpayers  of  the  nation  would  bear  a  burden, 
or  lose  a  chance  for  lower  taxes,  that  special  interests 
might  be  encouraged.  For  if  letting  American  ships 
use  the  canal  free  would  mean  that  the  canal  could  never 
pay  a  reasonable  return  on  its  cost,  then  taxpayers  must 
meet  the  deficit  by  taxes  paid  to  government  over  a 
series  of  years,  in  order  to  liquidate,  or  at  least  pay  in- 

•  For  a  discussion  of  the  economic  advisability  of  giving  American  coasting 
lines  this  special  privilege,  see  §  s  of  this  Chapter. 


ENCOURAGEMENT   OF   TRANSPORTATION    311 

terest  upon,  the  indebtedness  caused  by  building.  If, 
on  the  other  hand,  though  all  American  ships  used  the 
canal  free  of  tolls,  the  amounts  collected  from  foreign 
ships  would  suffice  to  pay  interest  on  the  debt  contracted, 
still  this  interest  might  be  had  and  more  besides,  were 
the  American  lines  also  made  to  contribute.^  In  other 
words,  to  allow  American  ships  free  use  of  the  canal  must, 
in  any  case,  mean  either  a  loss  or  a  smaller  net  revenue 
yielded  to  the  government  than  might  otherwise  be 
yielded.  If  the  canal  is  to  yield  the  nation  a  revenue 
because  of  its  use  by  foreign  ships,  that  revenue  should 
be  used  to  lighten  the  burden  of  taxation  on  the  whole 
people;  it  should  not  be  used  to  encourage  a  single 
industry  by  giving  it  something  for  nothing.  Thus  to 
encourage  American  shipping  would  be  to  give  it  an  ar- 
tificial advantage  over  other  American  industries,  and 
would  be,  in  so  far,  to  interfere  with  the  tendency  of 
labor  and  capital  to  engage  in  the  industries  really  most 
profitable  for  the  nation.  There  is  no  economic  gain^ 
in  having  our  commerce  carried  in  American  ships  if 
foreign  ships  are  able  to  carry  it  more  cheaply.  Nor 
would  the  prosperity  of  the  nation  as  a  whole,  including 
those  who  bear  the  burden  of  taxation,  be  so  much 
furthered  by  having  our  commerce  carried  in  American 
ships  which  could  pay  little  or  nothing  for  the  use  of  the 
canal,  as  by  having  it  carried  in  foreign  vessels  which 

>  It  is  not  intended  to  assert  that  either  American  or  foreign  ships  should  be 
charged  exorbitant  rates.  Such  rates  on  ships  carrying  .\merican  commerce, 
of  whatever  nationality  the  ships  might  be,  would  tend  to  discourage  this  com- 
merce, even  when  it  could  pay  the  proper  costs  of  its  own  movement  and  would 
therefore  be  profitable.  As  to  the  effect  on  American  welfare  of  exorbitant  rates 
charged  ships  not  carrying  American  commerce,  see  footnote  at  end  of  this 
section. 

'  Unless  we  assume  a  gain  from  the  advertisement  thus  secured.  See  §  2  of 
this  Chapter. 


312    TRANSPORTATION  COSTS  OF  COMMERCE 

could  pay  a  reasonable  amount  for  its  use  without  charg- 
ing correspondingly  higher  transportation  rates.  As- 
suming these  to  be  the  relative  abilities  of  native  and 
foreign  vessels,  the  foreign  vessels  would  be  a  more  eco- 
nomical means  for  us  of  carrying  our  commerce  than 
our  own ;  for  them  to  carry  it  would  mean  either  lower 
rates  and,  therefore,  lower  prices  to  consumers  and 
higher  prices  to  producers,  or  larger  returns  to  the  gov- 
ernment, favorable  to  taxpayers,  or  both  such  lower 
rates  and  higher  prices;  for  them  to  carry  our  com- 
merce would  mean  gain  to  our  people  as  producers  and 
consumers,  or  as  taxpayers,  or  as  both.  It  would  be 
desirable,  therefore,  for  our  capital  and  labor  to  seek 
other  kinds  of  activity ;  but  this  is  just  what  discrimina- 
tion in  the  rates  charged  for  use  of  the  canal  would 
prevent.^ 


The  Free  Use  for  Navigation,  of  Government-built  Canals 

Since  to  give  free  use  of  the  Panama  Canal  to  all  Ameri- 
can ships  and  to  no  others  seemed  clearly  to  involve 
a  violation  of  treaty  obligations.  Congress  was  content, 
in  the  Panama  Canal  Act  of  191 2,  to  confer  this  privi- 
lege only  upon  American  ships  engaged  in  the  coasting 
trade.  Even  this  lesser  tolls  exemption  appeared  to 
many  to  be  a  violation  of  treaty  rights ;    and  the  law 

'  Were  we  to  plan,  intelligently,  so  to  discriminate  in  rates  charged  for  use  of 
the  Panama  Canal,  as  to  pay  for  it,  as  largely  as  possible,  at  the  expense  of  for- 
eigners, we  would  base  the  discrimination  on  the  sources  and  destinations  of 
goods  carried,  rather  than  on  the  nationality  of  the  ships  which  carried  them. 
Goods  going  to  and  from  the  United  States  would  be  allowed,  perhaps,  to  pass 
through  the  canal  at  fairly  low  rates,  lest  American  consumers  or  producers  be 
unduly  taxed  ;  while  goods  going  from  one  foreign  country  to  another  would  be 
charged  the  highest  rates  possible  to  collect. 


ENCOURAGEMENT  OF   TRANSPORTATION     313 

has  recently/  at  the  request  of  President  Wilson,  been 
changed  in  this  regard  so  as  to  require  the  same  charges 
from  American  coasting  vessels  as  from  all  other  mer- 
chant ships.  We  shall  discuss,  here,  the  possible  eco- 
nomic effects  of  tolls  exemption  for  American  coasting 
ships.  As  we  have  already  seen,^  the  Federal  govern- 
ment assures  American  vessels  a  monopoly  of  the  coast- 
ing trade,  including  the  trade  from  any  port  of  the 
United  States  to  any  other  port,  e.g.  from  Baltimore  to 
San  Francisco.  Free  use  of  the  Panama  Canal  by  Ameri- 
can vessels  engaged  in  the  coasting  trade  could  not,  there- 
fore, increase  our  mercantile  marine  at  the  expense  of 
foreign  rivals  in  the  trade.  The  primary  effect  of  free 
tolls  to  this  special  class  of  ships  would  be  to  reduce  the 
expense  of  coast  to  coast  trade,  and  therefore,  supposedly, 
to  reduce  rates.  Possibly  foreign  vessels  could  carry  at 
the  lower  rates,  even  without  free  tolls.  If  the  coasting 
trade  were  open  to  foreign  ships,  the  effect  of  discrimi- 
nation in  favor  of  American  vessels  engaging  in  this 
trade  might  simply  be  that  the  American  ships  would  be 
able  to  get  part  of  the  trade  away  from  their  foreign 
competitors,  at  substantially  the  same  rates.  As  it  is, 
such  free  tolls  would  tend  to  make  rates  lower  than  they 
would  else  be,  though  much  of  the  saving  might  be  di- 
verted to  the  owners  of  monopolistic  navigation  com- 
panies. Hence  traffic  would  be  encouraged  to  go  through 
the  canal  which  otherwise  would  not. 

The  construction  of  a  canal  across  the  Isthmus  of 
Panama,  to  be  used  without  charge  by  American  coast- 
ing vessels,  would  therefore  mean  that  traf^c  from  the 
East  to  the  West,  and  vice  versa,  which  is  not  worth  the 
whole  cost  of  carrying,  might  nevertheless  be  carried 

*  June,  1914.  '  §  I  of  this  Chapter. 


314    TRANSPORTATION   COSTS   OF   COMMERCE 

at  the  expense  of  the  tax-paying  public.  If  it  is  worth 
$5000  to  get  certain  goods  from  New  York  to  San  Fran- 
cisco, and  the  cost  of  carriage,  including  proper  payment 
for  all  necessary  facilities,  is  $6000,  and  if  this  cost  is 
covered  by  the  charge  made,  the  goods  will  not  be  sent. 
It  will  be  more  economical  to  have  a  greater  degree  of 
local  self-sufficiency  and  less  geographical  division  of 
labor.  But  if  the  taxpayers  should  contribute  more 
than  $1000  in  the  form  of  maintenance  and  running 
cost  of  the  canal,  and  interest  on  its  cost  of  construction, 
then  the  goods  would  be  shipped,  for  the  charge  to  the 
shippers  could  be  made  less  than  $5000.  The  total  cost 
would  be  $6000  and  the  total  gain  would  be  $5000. 
There  would  be  a  real  net  loss.  But  this  loss  would  be 
borne  by  the  taxpayers,  and  therefore  the  traffic  would 
be  carried. 

Again,  the  encouragement  of  the  coasting  trade  by 
the  building  of  an  Isthmian  ship  canal  to  be  used  by 
coasting  vessels,  free  of  charge,  might  mean  that  goods 
would  be  carried  by  water  or  partly  by  water,  at  the  tax- 
payers' expense,  which  might  be  more  economically 
carried  by  rail.  Suppose  that  a  quantity  of  goods  can 
be  shipped  from  New  York  to  Salt  Lake  City  by  rail  for 
$4000,  including  a  proper  allowance  for  wages  of  em- 
ployees and  something  towards  profits.  Suppose  that, 
at  the  same  time,  the  cost  by  water  and  rail,  including 
risk,  damage,  longer  time  in  transit,  maintenance  cost 
of  the  canal  and  interest  on  canal  facilities  provided,  is 
$5000.  One  thousand  dollars  may  be  saved  if  the  goods 
go  by  rail,  and  to  make  them  go  by  the  other  route,  if 
we  include  interest  on  the  cost  of  partly  constructing 
this  route  for  them,  maintenance  expenses,  etc.,  would 
be  to  waste  $1000.    The  community  or  the  nation  would 


ENCOURAGEMENT   OF   TRANSPORTATION     315 

be  so  much  poorer,  yet  if  the  government  were  to  provide 
the  $1000  or  more  in  the  form  of  canal  faciUties  paid  for, 
eventually,  by  the  taxpayers,  shippers  would  gain  by 
using  the  waterway  route. 

It  is  not  asserted,  of  course,  that  all  goods  ought  to 
pay  in  the  same  proportion  to  use  the  canal,  if  discrimi- 
nations should  prove  to  be  practicable.  If  the  plant 
is  incompletely  utilized,  it  may  not  be  improper  to  let 
some  goods  go  through  for  comparatively  low  rates, 
provided  they  would  not  otherwise  go  at  all.  But  no 
goods  ought  to  be  allowed  to  go  through  which  cannot 
pay  at  least  a  fair  share  towards  running  expenses,  wear 
and  tear  from  use,  and  (probably)  a  httle  towards  inter- 
est. And  the  canal  should  not  have  been  built  (mili- 
tary considerations  aside  ^),  unless  it  was  expected  that 
the  traffic  through  it,  as  a  whole,  would  be  enough  cheaper 
to  pay  interest  on  it.  To  build  it,  if  it  could  not  be  made 
to  pay,  was  economic  waste,  was,  as  above  pointed  out, 
to  encourage  transportation  not  really  worth  its  total 
cost  to  the  people.  Now  that  the  canal  is  completed,  it 
would  be  unfair  to  the  American  people  as  a  whole  that 
the  traffic  which  goes  through  it  should  not,  if  possible, 
pay  for  it,  that  those  who  realize  the  chief  benefit  should 
not  contribute  in  proportion  to  the  benefit  realized. 

Here,  as  in  the  case  of  protection,  we  meet  the  possi- 
bility that  government  interference  with  the  direction  of 
industry  may  affect  differently  the  people  of  different 
sections,  benefiting  some  at  the  expense  of  others.  It  is 
obviously  only  that  part  of  our  population  living  on  or 
reasonably  near  the  coast,  which  has  much  to  gain  from 
subsidizing,  directly  or  indirectly,  coast  to  coast  water 

1  As  a  matter  of  fact,  it  is  hardly  to  be  doubted  that  economic  considerations 
had  great  weight  in  inducing  its  construction. 


31 6    TRANSPORTATION   COSTS  OF   COMMERCE 

transportation.  Those  living  in  the  far  interior  will,  in 
any  event,  have  to  rely  mainly  on  other  means  of  trans- 
portation. Yet  by  the  scheme  of  indirect  subsidizing 
under  discussion,  but  which  has,  fortunately,  been  aban- 
doned, those  in  the  interior  would  be  made  to  contribute 
to  the  cost  of  facihties  of  transportation  which  others 
use  and  which  they  cannot  use  in  the  same  degree. '^ 

The  principles  above  elaborated  apply  equally  when 
government  builds  canals  in  the  interior,  if  traffic  is 
allowed  to  use  these  canals  free  of  charge.  New  York 
State  is  now  enlarging  the  once  busy  and  profitable  Erie 
Canal  at  an  estimated  cost  of  not  less  than  $100,000,000, 
in  order  that  it  may  carry  barges  of  1000  tons'  capacity 
from  the  Atlantic  Ocean  to  the  Great  Lakes  and  vice 
versa.  The  plan  is  to  charge  nothing  for  the  use  of  the 
canal.  This  will  mean  a  burden  on  the  taxpayers  of 
the  state,  an  uncompensated  loss  to  the  taxpayers  in 
those  parts  of  the  state  which  cannot  economically  use 
the  canal  either  to  market  their  produce  or  to  obtain 
goods  for  consumption.  It  amounts  to  a  gift  by  the  tax- 
payers of  the  state  of  New  York  to  those  producers  and 
consumers  in  other  states  who  can  sell  their  products  for 
more  or  buy  desired  goods  for  less,  because  of  the  free 
use  of  the  Erie  Canal.  It  involves  encouragement  to 
transportation  via  the  canal  of  goods  which  might  better 
go  by  railway  or  by  the  St.  Lawrence  River.  If  the  traffic 
which  is  expected  to  use  the  canal  would  be  able  to  pay 
the  cost  of  operation  and  maintenance,  and  interest  on 
the  $100,000,000  or  more  sunk  and  to  be  sunk,  then  it 

*  An  excuse  for  such  discrimination  against  dwellers  in  the  interior  might 
perhaps  be  found  in  the  fact  that  those  living  on  the  coast  chiefly  bear  the  burden 
resulting  from  the  limitation  of  the  coasting  trade  to  American  vessels.  Two 
policies,  each  tending  towards  economic  waste,  would  partially  offset  each  other 
as  regards  inequality  of  effect. 


ENCOURAGEMENT  OF  TRANSPORTATION    317 

should  be  charged  this  cost  and  interest,  to  the  end  that 
those  who  reap  the  benefit  of  the  canal  in  lower  cost  of 
carriage,  and  in  prices  of  goods  higher  to  producers  and 
lower  to  consumers,  shall  pay  for  the  advantage  so  se- 
cured ;  and  that  those  who  reap  the  most  gain  shall  pay 
the  most ;  and  to  the  end  that  the  burden  shall  not  fall 
upon  the  general  public  without  any  regard  to  propor- 
tionate use  and  to  benefits  received.^  If,  on  the  other 
hand,  it  is  not  believed  that  those  using  the  canal  can 
meet  such  charges  and  still  find  it  profitable  to  carry 
goods  over  it,  then  we  must  conclude  that  the  canal 
ought  not  to  be  (or,  in  part,  to  have  been)  enlarged, 
since  the  total  expenses,  including  cost  of  this  enlarge- 
ment, of  carrying  goods  over  it,  will  probably  be  greater 
than  the  benefits  to  be  received  from  transporting  the 
goods,  or  will  be  greater  than  if  the  goods  were  carried 
over  another  route,  e.g.  a  railroad. 

Before  the  days  of  railroads,  much  confidence  was  felt 
in  the  possibiHties  of  canals.  A  number  of  our  states 
expended  a  great  deal  of  money  in  canal  building.  To- 
day it  is  generally  recognized  that,  since  the  capital  cost 
of  canals  is  a  tremendous  initial  expense,  railroads  are 
usually  cheaper.  Only  in  a  comparatively  few  cases 
can  canal  building  be  expected  to  pay.  These  are,  first, 
cases  where  the  canals  connect  navigable  waters  located 
near  to  each  other,  and  between  which,  if  they  are  con- 
nected by  a  canal,  there  will  be  large  traffic ;    second, 

'  It  is  no  sufficient  answer  to  this  contention  to  cite  the  usual  practice  regard- 
ing our  numerous  streets  and  roads.  To  charge  tolls,  individually,  on  each 
person  as  he  used  any  given  street,  would  obviously  be  an  intolerable  nuisance. 
These  facilities  we  must  have,  anyway,  and  substantial  justice  may  be  secured, 
if  care  is  taken  to  avoid  extravagance,  by  levying  on  local  property  owners  accord- 
ing to  some  fair  system.  Since  land  values  depend  largely  on  streets,  etc.,  it 
may  be  possible,  by  basing  assessments  or  taxes  on  land  values,  to  make  costs 
to  different  persons  vary,  on  the  whole,  in  proportion  to  benefits. 


3i8    TRANSPORTATION   COSTS  OF   COMMERCE 

cases  where  comparatively  short  canals,  like  the  Suez 
Canal,  save  a  very  great  sailing  distance  and  so  are  ex- 
tensively used ;  third,  cases  more  doubtful,  where  short 
canals  connect  with  the  ocean  great  cities  which  have 
grown  up  not  far  from  it.^  "Practically  all  the  canals 
now  in  most  successful  use  are  ship  canals,  forming 
comparatively  short  links  between  important  natural 
waterways,  and  opening  up  extended  routes  of  trans- 
portation by  water  for  large  vessels.  Such  short-link 
ship  canals  are  to  be  clearly  distinguished  from  long  in- 
land canals,  and  the  success  of  the  one  offers  no  safe 
criterion  as  to  the  probable  success  of  the  other."  ^ 
Moulton's  study  of  the  much-vaunted  waterway  system 
of  Germany  seems  to  provide  conclusive  evidence  that 
canals  are  as  cheap  as  railways  for  shippers,  only  if  the 
taxpayers,  in  effect,  help  pay  the  freight,  and  that,  in 
general,  canals  and  canalized  rivers  involve  tremendous 
loss  to  the  nation  which  undertakes  their  construction, 
and  are  therefore  a  source  of  industrial  and  commercial 
weakness  rather  than  of  strength.^ 

If  there  were  adequate  reason  to  believe  that  canals, 
generally,  were  cheaper  and  more  satisfactory  means  of 
transportation  than  railroads,  it  would  not  be  necessary 
to  have  pubhc  agitation  and  political  pressure  to  get 
canals  built.  Private  companies  would  undertake  to 
build  them  for  profit,  just  as  they  build  railroads  for 
profit,  and  just  as  canals  were  built,  in  England  particu- 

1  Preliminary  Report  of  United  States  National  Waterways  Commission, 
191 1,  pp.  13,  14.  Reprinted  in  Final  Report,  191 2,  pp.  75,  76.  See,  however, 
as  to  an  example  of  the  third  class  of  cases,  viz.,  the  Manchester  Ship  Canal, 
Moulton,  Waterways  versus  Railways,  Boston  and  New  York  (Houghton  Mifflin 
Co.),  191 2,  Chapter  VII. 

'  Report  of  Commissioner  of  Corporations  on  Transportation  by  Water  in 
the  United  Slates,  Part  I,  p.  45. 

'  Moulton,  Waterways  versus  Railways,  Chapters  IX,  X. 


ENCOURAGEMENT  OF   TRANSPORTATION     319 

larly,  before  the  days  of  railroads.^  As  a  matter  of  fact, 
investors  are  not  clamoring  for  a  chance  to  buy  the  securi- 
ties of  such  companies,  nor  are  promoters  eagerly  looking 
for  opportunities  to  project  new  lines.  When  the  build- 
ing of  canals  is  mentioned  favorably,  the  assumption  is 
always  made  that  taxpayers  shall  bear  the  burden,  or 
at  least  the  risk,  of  building  them. 

§6 

The  Improvement  of  Harbors 

Water  transportation  which  is  not  worth  its  cost  may 
likewise  be  stimulated  by  a  wrong  system  of  harbor  im- 
provement. In  the  United  States,  the  construction  and 
care  of  lighthouses,  the  building  of  breakwaters,  the 
dredging  of  harbors,  and  the  dredging  of  channels  between 
the  sea  and  harbors,  are  done  largely  by  the  Federal  gov- 
ernment.2  It  cannot  be  said  that  nothing  is  paid  to- 
wards the  expenses  involved,  by  the  traffic  aided,  since 
the  tonnage  dues  collected  by  the  government  amount 
to  $800,000  or  $900,000  a  year.^  But  considering  the 
fact  that  the  Federal  goverrmient  appropriates  about 
$5,000,000  a  year  for  lighthouse  maintenance  alone,^  and, 
on  the  average,  appropriates  miUions  of  dollars  each  year 
for  dredging,  breakwater  construction,  etc.,  the  traffic 
entering  and  leaving  the  ports  of  the  United  States  can- 
not be  said  to  bear  the  costs  which  it  occasions.     Rather 

*  Ibid.,  p.  gg. 

*  Report  of  Commissioner  of  Corporations  on  Transportation  by  Water  in  the 
United  States,  Part  III,  igog,  pp.  3g,  40. 

'  Johnson,  Ocean  and  Inland  Water  Transportation,  New  York  (Appleton), 
igii,  p.  252.  Given  in  Report  of  Commissioner  of  Corporations  on  Transporta- 
tion by  Water  in  the  United  States,  Part  I,  p.  404,  as  $1,076,571.69  in  1908. 
The  coasting  trade  is  free  even  from  this. 

*  Ibid.,  p.  262. 


320    TRANSPORTATION   COSTS  OF  COMMERCE 

is  this  trafi&c,  in  a  considerable  degree,  subsidized  at  the 
expense  of  taxpayers.  As  with  canals,  so  with  light- 
houses and  harbors,  we  must  conclude  that  those  who 
benefit  by  them  should  be  the  ones  required  to  pay  for 
them,  and  that  to  place  the  burden  of  their  construction 
and  support  on  the  general  public,  with  no  reference  to 
benefit  received,  is  undesirable  and  unfair.^  We  must 
further  conclude  that  constructions  and  improvements 
made  in  harbors,  for  which  the  traffic  using  the  harbors 
cannot  afford  to  pay,  involve  national  economic  loss  and 
ought  not  to  be  undertaken. 

In  many  cases  the  money  spent  in  harbor  improve- 
ments by  the  Federal  government  is  wholly  or  partly 
wasted,  for  appropriations  are  frequently  made  for  which 
there  is  no  economic  justification  and  for  which  there 
would  be  no  economic  justification  even  if  the  largest 
sums  possible  were  to  be  reaUzed  by  charging  the  users. 
Such  wasteful  appropriations  are  doubtless  in  part  due 
to  lack  of  business  sense  among  legislators.  They  are 
perhaps  more  largely  due  to  the  pressure  of  local  interests. 
The  very  fact  that  these  appropriations  are  so  largely 
made  by  the  central  government,  and  that  there  is,  or 

'  It  is  not  a  sufficient  answer  to  the  above  argument,  to  assert  that  our  tariff 
system  taxes  trade  and  that  therefore  this  trade  pays  for  itself  by  paying  for 
the  faciUties  used.  For  the  burden,  nevertheless,  does  not  fall  where  it  properly 
belongs.  It  does  not  fall  anything  like  evenly  on  all  traffic  which  uses  the  facili- 
ties provided.  On  some  goods  the  tariff  has  been,  until  recently,  prohibitive, 
artificially  interfering  with  normal  and  profitable  trade.  On  other  commerce 
and  on  passenger  traffic,  the  tariff  duties  are  little  or  nothing.  Such  commerce 
and  traffic  may,  in  effect,  be  receiving  a  subsidy,  while  the  remainder  of  commerce 
is  burdened.  The  principle  of  charging  the  cost  of  facilities  provided  to  those 
who  use  them  and  upon  different  interests  in  some  proper  proportion  to  the 
benefit  received,  is  not  conformed  to.  We  fall  far  short  of  the  economic  ideal 
when  we  set  up  contradictory  policies  of  discouragement  and  encouragement. 
These  contradictory  policies  do  not  exactly  neutralize  each  other,  but  in  one  case 
there  is  a  net  loss  in  one  direction,  and  elsewhere  there  is  a  net  loss  in  another 
direction. 


ENCOURAGEMENT  OF  TRANSPORTATION     321 

seems  to  be,  a  chance  for  interested  localities  to  get  some- 
thing for  nothing,  results  in  expenditures  which  would 
not  be  made  if  the  localities  particularly  concerned  had 
always  to  provide  the  means,  or  if  private  capital  had  to 
be  induced  to  do  so.^ 

A  different  system,  and  one  which  is  economically 
more  defensible,  is  that  common  in  Great  Britain.  There 
the  central  government,  except  as  naval  considerations 
may  be  involved,  does  nothing  whatever  by  way  of  har- 
bor improvement,  but  leaves  this  matter  to  the  locahties 
immediately  concerned.  The  British  system  of  harbor 
improvement  and  maintenance  requires  the  creation  for 
each  harbor  of  a  so-called  "public  trust"  or  public  harbor 
trust.-  A  public  harbor  trust  is  a  semi-public  body  or  a 
corporation,  authorized  by  parliament,  to  which  body  is 
granted  power  to  own,  improve,  and  manage  a  particu- 
lar harbor.  It  has  been  compared  ^  to  the  board  of 
trustees  of 'an  American  university  or  charitable  institu- 
tion. The  members  receive  no  salaries,  but  regard  their 
position  as  an  honorary  one.  The  composition  of  a 
harbor  trust  is  determined  by  statute.  Representatives 
are  usually  selected  by  the  British  government,  the 
government  of  the  city  concerned,  boards  of  trade  and 
chambers  of  commerce,  ship  owners'  associations,  and 
other  interested  parties.  Money  is  borrowed  for  neces- 
sary improvements,  usually  at  low  rates,  for  the  harbor 
trust  is  authorized  to  collect  port  and  dock  charges  from 
vessels  utilizing  the  facilities  given,  and  this  power  makes 
the  security  good,  at  least  in  the  case  of  a  port  sure  to  have 

1  Cf.  Preliminary  Report  of  National  Waterways  Commission,  p.  20  (Final 
Report,  p.  82). 

2  Described  in  Smith,  The  Orgauizatian  of  Ocean  Commerce,  Philadelphia 
(Publications  of  the  University  of  Pennsylvania),  1905,  pp.  129,  130. 

*Ibid. 


322    TRANSPORTATION   COSTS   OF   COMMERCE 

large  traffic.  Sometimes  money  is  borrowed  from  the 
municipality  itself.  In  any  case,  money  needed,  in  excess 
of  what  has  been  collected  in  previous  years  from  traffic, 
is  borrowed,  and  must  be  paid  back  out  of  future  collec- 
tions. There  are  no  stockholders,  and,  therefore,  there 
is  no  attempt  to  make  a  profit  above  a  fair  interest  and 
sinking  fund.  Indeed,  a  private  corporation  authorized 
to  collect  tolls  from  all  the  shipping  of  a  port,  for  the 
sake  of  dividends  to  stockholders,  would,  unless  strictly 
regulated,  be  an  intolerable  monopoly. 

But  the  British  system  of  harbor  control  does  make 
the  traffic  pay  for  the  facilities  required,  and  is  in  so  far 
consistent  with  the  economic  principles  so  wisely  applied 
to  British  trade  and  commerce  generally.  There  is  no 
attempt  to  encourage  trade  which  is  not  nationally 
profitable,  by  partly  supporting  it,  i.e.  by  providing  free 
harbor  facilities  at  public  expense  and,  therefore,  at  the 
expense  of  other  lines  of  economic  activity,  any  more 
than  there  is  the  attempt  to  interfere  with  nationally 
profitable  trade  by  high  tariff  duties.  The  public  trust 
unites  responsibility  with  direct  action.  It  furthers 
efficiency,  economy,  and  lowness  of  rates,  but  it  does  not 
subsidize. 

The  function  of  maintaining  lighthouses,  however, 
almost  of  necessity  devolves  upon  a  central  government. 
No  city  or  private  corporation  is  in  a  position  to  perform 
this  function  and  make  the  traffic  benefited  pay  for  the 
service  provided,  since  much  of  the  benefit  will  be  re- 
ceived by  vessels  which  have  no  occasion  to  visit  the  par- 
ticular city  or  to  come  within  reach  of  the  particular 
corporation.  The  British  government,  therefore,  main- 
tains the  lighthouses,  but  collects  "Hght  dues"  in  return, 
amounting  to  about  $2,500,000  yearly,   from  vessels 


ENCOURAGEMENT   OF  TRANSPORTATION     323 

entering  English  harbors.  These  dues  pay  the  entire 
yearly  cost  of  maintaining  the  lighthouses  and  about 
$250,000  a  year  besides.^  Here,  also,  is  no  policy  of 
subsidizing,  no  attempt  to  foster  one  industry  at  the 
taxpayers'  expense,  or  to  encourage  an  undue  and  un- 
economical geographical  division  of  labor. 

§  7 
The  Improvement  of  Rivers 

The  responsibihty  for  the  improvement  of  rivers,  like 
that  for  the  improvement  of  harbors,  has  rested,  in  the 
United  States,  chiefly  with  the  Federal  government. 
The  work  done  has  included  the  removal  of  obstructions 
to  navigation,  the  deepening  of  channels  by  dredging,  the 
construction  of  revetments,  and  the  development  of  slack- 
water  navigation  by  the  building  of  locks  and  dams  to 
maintain  a  navigable  depth.  Improvements  of  this  sort 
have  been  carried  out,  to  some  extent,  on  most  of  the 
navigable  rivers  of  the  country.  But  the  appropria- 
tions of  Congress  for  these  purposes  have  not  always 
been  wisely  made,  nor  has  the  distribution  of  improve- 
ments throughout  the  country  been  influenced  solely  by 
commercial  or  economic  considerations. 

Let  us  notice  one  or  two  typical  instances  of  Federal 
activity  in  river  improving.  To  improve  the  Mississippi 
River,  the  government  has  spent,  in  all,  more  than 
$90,000,000.-  Of  this  amount,  $15,000,000  has  been 
spent  on  the  200-mile  stretch  between  the  mouths  of  the 

*  Johnson,  Ocean  and  Inland  Water  Transportalion,  p.  262.  If  the  slight 
charge  above  yearly  cost  is  criticized,  it  should  be  remembered  that  a  reasonable 
return  on  investment  is  not  an  improper  aim. 

2  The  Report  of  the  Commissioner  of  Corporations  on  Transportalion  by 
Water  in  the  United  Slates,  1909,  Part  I,  p.  47,  gives  $97,685,920. 


324    TRANSPORTATION   COSTS   OF   COMMERCE 

Missouri  and  Ohio  rivers.^  But  the  traffic  on  this 
stretch  of  the  river,  including  that  of  St.  Louis  (which 
is  located  between  these  points  near  the  Missouri),  has 
steadily  decreased.  In  1880,  upwards  of  a  milKon  tons 
of  freight  were  shipped  from  St.  Louis.  In  1900,  the 
amount  aggregated  only  245,000  tons,  and  in  191 1,  only 
191,965  tons.  Is  it  safe  to  assume  that  there  has  been  so 
much  saving  in  the  expense  of  carrying  this  traffic,  as 
compared  with  what  it  would  have  cost  to  carry  it  by 
rail,  or  to  carry  it  on  the  unimproved  river,  as  to  compen- 
sate for  the  money  sunk?  Would  those  who  have  used 
this  section  of  the  river  have  been  willing  to  invest, 
jointly,  the  $15,000,000,  in  order  to  have  the  better 
navigation  conditions  which  that  investment  has  made 
possible  ? 

If  there  remains  any  doubt  in  this  case  that  money 
has  been  unwisely  spent,  there  can  be  no  doubt  in  other 
cases  that  public  funds  have  been  wasted  for  the  sake  of 
returns  to  private  interests  and  to  limited  territories, 
almost  incomparably  less  than  the  general  loss.  The  Big 
Sandy  River  is  a  tributary  of  the  Ohio  River.  The  Big 
Sandy  and  its  two  branches  or  tributaries,  the  Tug  and 
Levisa  rivers,  lie  in  Kentucky  and  West  Virginia.  On 
their  improvement,  the  Federal  government  has  spent, 
in  all,  about  $1,700,000.  Excluding  timber,  which  can 
be  and  commonly  is  floated  down-stream,  the  average 
yearly  traffic  on  these  rivers  is  about  2000  tons.  Reckon- 
ing interest  on  this  $1,700,000  as  only  $40,000,  or  less 
than  2I  per  cent,  a  year,  the  annual  cost  to  the  United 
States  of  providing  facilities  for  this  traffic  is  $20  per 

>  The  facts  and  figures  in  this  and  the  next  paragraph  are  taken  chiefly  from 
an  article  by  Herbert  Brace  Fuller,  in  the  Century  Magazine,  January,  1913, 
pp.  386-395,  entitled  "American  Waterways  and  the  Pork  Barrel." 


ENCOURAGEMENT  OF  TRANSPORTATION     325 

ton  a  year.  Adding  $20,000  a  year  for  maintenance, 
we  have  a  cost  of  $30  a  ton. 

Average  railroad  charges  in  the  United  States  are  con- 
siderably less  than  one  cent  per  ton  mile.^  For  low- 
grade  freight  (the  only  kind  which  makes  much  use  of 
inland  waterways)  going  long  distances,  railroad  charges 
average  very  much  less  than  this,  probably  markedly 
less  than  a  half  cent.  The  facilities  provided  by  the 
government  on  the  above-mentioned  three  rivers  would, 
therefore,  have  to  reduce  the  transportation  cost  upon 
them  to  zero,  in  order  that  the  construction  or  invest- 
ment by  the  government  should  be  proved  worth  while, 
unless  the  traflic  benefited  moved  an  average  distance 
of  over  6000  miles.  For  even  at  zero  cost  of  carriage, 
each  ton  carried  one  mile  would  secure  a  saving  of  but 
one  half  a  cent.  And  unless  it  were  carried  6000  miles, 
the  total  saving  would  not  amount  to  the  $30  interest 
and  maintenance  cost. 

What  is  the  reason  for  the  numerous  appropriations  of 
this  sort  made  by  our  government?  A  partial  explana- 
tion may  be  found  in  the  current  American  practice  of 
donating  to  commerce  the  improvements  made,  and 
letting  the  general  public  bear  the  burden  in  indirect 
and,  therefore,  hardly  reaUzed  taxation.  Commercial 
interests  are  the  more  ready  to  plead  for  comparatively 
useless  dredgings,  revetments,  and  canalizations,  because, 
however  small  the  benefits  are,  they  reap  these  benefits, 
and  because,  however  heavy  the  cost  is,  others  mainly 
bear  it.  Any  reform  which  goes  to  the  root  of  the  evil 
must  espouse  the  principle  of  making  those  contribute 
most  to  the  fixed  charges  and  maintenance  costs  of  navi- 

•  Statistics  of  Railways  in  the  United  States,  Interstate  Commerce  Com- 
mission, 1910,  p.  59. 


326    TRANSPORTATION   COSTS  OF  COMMERCE 

gation  improvements,  who  chiefly  use  those  improve- 
ments and  to  whom  their  benefits  chiefly  go. 

A  further  partial  explanation  is  suggested  by  noting 
the  distribution,  throughout  the  country,  of  money 
appropriated  for  waterways.  In  the  general  River  and 
Harbor  Act  of  1910,  appropriations  were  received  by  296 
congressional  districts  in  the  United  States,  out  of  a 
total  of  391,^  in  other  words,  by  over  three  fourths  of 
such  districts.  Apparently  the  appropriations  were 
given  to  nearly  every  district  in  which  there  was  a  stream 
or  harbor  offering  any  excuse  for  expenditure.  This 
River  and  Harbor  Act  illustrates  what  has  been  called 
the  "pork  barrel"  system  of  waterway  development. 

The  difficulty  is  one  which  seems  to  apply  generally  to 
the  activities  of  a  democratic  government.  A  despotic 
or  aristocratic  government  is  based  on  the  privilege  of 
special  persons  or  classes.  It  governs  largely  in  the  in- 
terest of  legally  privileged  classes.  It  insures  to  those 
classes,  political  and  economic  privileges  maintained  at 
the  expense  of  others.  Such  a  government  was  that  of 
France  before  the  Revolution.  Such  is  that  of  Russia 
to-day.  In  the  case  of  a  popular  government  and  an  in- 
telligent people,  privilege  is  probably  less  excessive,  and 
its  forms  less  obnoxious.  But  there  may  still  be,  espe- 
cially if  the  government  carries  on  industrial  functions 
or  interferes  at  all  with  the  natural  laws  of  trade,  the 
privilege  which  comes  from  bargaining.  One  class 
wants  a  special  kind  of  tariff  law,  adverse  to  the  public 
interest.  Another  class  desires  legislation  subversive  of 
currency  stability,  also  contrary  to  the  general  welfare. 
The  representatives  of  each,  in  Congress,  may  support 
the  desires  of  the  other,  in  return  for  counter  support. 

I  Fuller,  "  American  Waterways  and  the  Pork.  Barrel,"  loc.  cit. 


ENCOURAGEMENT   OF  TR.ANSPORTATION    327 

The  evil  shows  itself  most  of  all,  perhaps,  through  the 
influence  exerted  by  localities  or  by  special  interests  in 
different  locaUties.  We  have  noted  this  particularly  in 
the  case  of  the  protective  tariff.'  And  just  as,  in  the 
case  of  the  tariff,  congressional  representatives  from 
different  states  and  districts  desire,  each,  to  get  or  keep 
a  high  tariff  for  the  goods  produced  in  his  district,  what- 
ever the  effect  on  the  common  weal,  and  sometimes  in- 
consistently with  their  party  platforms,  so  these  repre- 
sentatives desire  appropriations  of  money  to  improve 
waterways,  each  for  his  own  district,  even  though  the  cost 
to  the  country  as  a  whole  far  exceeds  the  benefit,  and 
even  though  each  district  suffers  more  from  its  forced 
contributions  to  improvements  in  other  districts,  than 
it  gains.  There  is,  consequently,  a  process  of  "log- 
rolling," so-called,  in  which  A  votes  for  B's  project  in 
return  for  support  of  his  own ;  and  the  ultimate  result 
is  an  appropriation  or  set  of  appropriations  having  no 
consistency  and  involving  general  loss. 

Each  Congressman  thus  acting,  feels  that  he  is  gaining 
favor  with  his  constituents.  The  persons  interested  in 
local  waterway  constructions  make  representations  to 
him  regarding  the  importance  of  them.  He  feels  that 
the  people  of  his  district  are  not  concerned  primarily  in 
having  him  act  the  part  of  a  wise  and  conscientious 
legislator,  careful  not  to  waste  the  nation's  resources, 
but  that  they  are  concerned  rather  in  having  him  "do 
something"  for  them.  If  he  succeeds  in  getting  what  is 
desired,  the  newspapers  of  the  district  publish  the  fact 
that,  through  his  influence,  Congress  has  been  led  to  ap- 
propriate a  sum  to  improve  navigation  on  the  local  stream 
or  to  deepen  the  local  harbor.    The  fault  is  not  alone 

1  Part  II,  Chapter  VI,  §  6. 


328    TRANSPORTATION  COSTS   OF   COMMERCE 

that  of  the  Congressman  who,  under  such  circumstances, 
does  the  thing  which  he  beHeves  his  constituents  desire, 
but  is  also  largely  the  fault  of  those  constituents  them- 
selves, whose  selfish  local  interests  overshadow  in  their 
minds  the  greater  interests  of  the  nation  of  which  they 
are  a  part,  and  whose  Hmited  intelligence  will  not  let 
them  see  that  the  system  practiced  is  Hkely,  in  the  end, 
to  hurt  more  than  to  help  even  their  own  welfare. 

It  would  seem,  then,  that  a  reform  which  would  go  to 
the  root  of  the  difficulty  must  not  only  insist  upon  the 
attempt  to  charge  users  rather  than  taxpayers,  for  facili- 
ties provided,  but  must  also  insist  that  the  entire  first 
cost  and  risk  of  constructing  these  facihties  shall  not  fall 
upon  the  nation  as  a  whole.  If  government  expenditure 
rather  than  private  investment  is  thought  to  be  necessary 
to  improve  certain  waterways,  at  least  the  government 
expenditure  and  risk  should  be  partly  borne  by  localities 
most  directly  concerned.  If  such  localities  will  not  sup- 
port certain  improvements,  themselves,  they  should  not 
expect  the  nation  to  do  so.  If  the  nation  refuses  to 
bear  the  burden  alone,  but  insists,  always,  upon  local 
aid,  there  will  be  far  less  pressure  for  Federal  appropria- 
tions, and  many  wasteful  expenditures  will  be  avoided.^ 

§8 
Subsidies  to  Railroad  Building 

The  subsidizing  of  transportation  by  government 
has  extended,  in  the  United  States  (not  to  mention 
other  countries),  to  railroads  also.     The  railroads  of  the 

>  Cf.  Preliminary  Report  of  National  Waterways  Commission,  pp.  ig,  20 
(Final  Report,  pp.  81,  82).  See  also  Report  of  Commissioner  of  Corporations 
on  Transportation  by  Water  in  the  United  States,  Part  I,  pp.  8,  59,  for  reference  to 
European  practice. 


ENCOURAGEMENT  OF  TRANSPORTATION     329 

United  States  have,  it  is  true,  been  built  pretty  largely 
with  private  capital,  but  they  have  also  received  aid 
from  the  national  government,  from  many  of  the  states, 
and  even  from  county  and  city  governments.  The 
states  and  local  governments,  in  some  instances,  invested 
in  railroad  securities,  so  enabling  the  roads  to  get  capital 
which,  perhaps,  private  persons  would  have  been  less 
ready  to  provide.  But  the  Federal  government,  in  addi- 
tion to  making  loans,  made  very  extensive  land  grants  to 
companies  constructing  numerous  desired  Hnes,^  chiefly 
in  the  less  densely  settled  parts  of  the  country,  the  West 
and  Southwest.  The  grants  made  between  1850  and 
187 1  turned  over  to  the  railroad  companies  about  159 
million  acres  of  the  public  domain,  an  area  exceeding 
five  states  the  size  of  Pennsylvania.-  So  far  as  the  land 
grant  policy  was  based  on  military  conditions,  we  cannot 
judge  it  on  economic  grounds  alone.  But  so  far  as  it 
can  be  regarded  as  a  commercial  policy,  it  can  be  judged 
in  the  hght  of  commercial  principles. 

We  shall  not,  of  course,  be  able  to  decide,  absolutely, 
whether  the  land  grants  and  other  government  aid  to 
the  railroads  actually  decreased  the  total  of  national 
wealth.  So  to  decide,  we  should  have  to  know  not  only 
what  has  happened,  but  just  what  would  have  happened 
if  business  and  transportation  development  had  taken 

*  See,  on  this  subject,  Haney,  A  Congressional  History  of  Railways  in  the  United 
States,  Vol.  II.  The  Railway  in  Congress:  1850-1887,  Madison,  Wis.  (Demo- 
crat Printing  Co.,  State  Printer),  1910,  Chapters  II,  III.  Also  Sanborn,  Congres- 
sional Grants  of  Land  in  A  id  of  Railways,  Madison  (Bulletin  of  the  University  of 
Wisconsin),  1899,  Chapters  VI,  VII.  A  good  brief  account  is  in  Johnson, 
American  Railway  Trans portalion,  2d  revised  edition,  New  York  (Appleton), 
1909,  Chapter  XXII. 

'  Not  including  land  forfeited  by  failure  to  conform  to  conditions.  The 
granting  of  the  mere  rights  of  way  might  be  regarded  as  analogous  to  the  grant- 
ing of  farms  to  actual  settlers.  But  the  granting  of  millions  of  acres  additional 
cannot  be  so  regarded. 


330    TRANSPORTATION   COSTS  OF   COMMERCE 

its  natural  course.  But  we  can  lay  down  general  prin- 
ciples of  usual  application,  which,  in  the  long  run,  are 
apt  to  be  safest  to  follow. 

To  begin  with,  it  must  be  admitted  that  there  is  such 
a  thing  as  undesirable  transportation.  The  labor  and 
capital  of  a  country  should  be  applied  in  order  of  prefer- 
ence to  different  industries  according  to  their  relative 
importance,  according  to  the  relative  need  for  them.  In 
other  words,  the  people  should  devote  their  efforts  to  the 
activities  which  pay  best.  It  maybe  said  that  the  people 
Hving  in  the  Middle  West  and  Far  West,  where  railroad 
building  was  encouraged  by  government  more  than  in 
the  East,  desired  railroads  as  a  means  of  reaching  eastern 
markets.  But  the  mere  existence  of  railroads  leading  to 
markets  does  not  in  itself  mean  greater  prosperity,  since 
the  benefits  so  received  may  be  appreciably  less  than  if 
the  same  capital  were  invested  in  some  kind  of  produc- 
tive enterprise  for  immediate  local  needs.  Unless  the 
trade  made  possible  by  a  railway  brings  as  much  wealth 
and  prosperity  as  could  have  been  had  by  foregoing  the 
trade  and  producing  more  locally,  unless,  that  is,  as 
much  of  desired  wealth  is  produced  by  the  railway  as 
would  be  produced  were  the  labor  and  capital  applied 
instead  to  the  farms  and  ranches,  to  building  houses, 
making  furniture,  etc.,  the  building  of  the  road  is  not 
economy  for  the  community.  If  a  railroad  when  con- 
structed will  yield  the  people  of  a  community  a  benefit 
equivalent  to  what  the  same  investment  would  yield  in 
another  line,  then  those  who  receive  this  benefit  can 
afford  to  pay,  for  the  use  of  the  railroad,  a  proper  return 
on  the  capital  invested.  If  they  cannot  afford  to  pay 
such  a  return,  it  must  be  because  they  are  not  receiving 
a   correspondingly   valuable   service  and,   therefore,   it 


ENCOURAGEMENT  OF  TRANSPORTATION     331 

must  be  that  the  capital  invested  in  the  railroad  is  not 
producing  the  value  which  it  might  have  produced  if 
invested  otherwise. 

If  the  territory  through  which  a  railroad  is  desired  is 
sparsely  settled  and  would  offer  but  small  traflic  in  pro- 
portion to  trackage,  thus  only  very  partially  utilizing 
the  plant  of  the  railroad,  then  high  charges  would  be 
required,  in  order  that  the  railway  plant  might  pay  to 
the  owners  the  average  rate  of  profit  on  investment. 
But  high  charges  may  be  as  serious  preventives  of  reach- 
ing markets  as  absence  of  railroads  leading  to  markets. 
If,  therefore,  only  small  traffic  can  be  hoped  for,  it  may 
be  truer  economy  for  the  territory  concerned  and  the 
various  communities  in  it,  to  be  more  self-sufficient,  to 
depend  more  exclusively  on  natural  waterways,  or  to 
carry  goods  by  using  horses  and  vans,  than  to  build  a 
railroad. 

The  people  of  a  given  section  of  the  country  may 
think  that  they  gain  nothing  by  having  an  incompletely 
utilized  railroad,  if  they  have  to  pay,  in  high  freight  and 
passenger  rates,  interest  on  its  cost.  They  may  not  be 
prepared  to  patronize  such  a  road,  feeling  that  the  serv- 
ice is  not  worth  the  charges.  Yet  if  the  road  is  paid 
for  in  part  by  government  aid,  even  though  they  have  to 
pay  the  taxes  that  make  the  aid  possible,  they  may  de- 
lude themselves  into  thinking  that  they  are  gainers  by 
having  the  railroad.  Nevertheless,  the  people  are  pay- 
ing for  the  service  rendered  just  as  surely  by  this  method 
as  by  the  other,  and  if  it  is  unprofitable  for  them 
to  pay  the  amount  in  the  one  way,  it  is  unprofitable  to 
pay  it  in  the  other.  The  chief  difference  is  that  if  gov- 
ernment supports  the  enterprise  without  receiving  any 
corresponding  return,  the  cost  of  the  service  rendered  is 


332    TRANSPORTATION   COSTS  OF   COMMERCE 

paid  for  by  the  people  without  any  regard  to  the  propor- 
tionate benefits  received. 

If  the  assistance  is  by  grants  of  land,  the  essential 
principle  of  the  policy  is  the  same.  The  public  domain 
belongs  to  the  whole  people.  It  rests  with  them  to  give 
it  to  settlers,  to  keep  it  as  forest  reserve  and  for  other 
purposes,  or  to  secure  money  revenue  by  selling  it.  To 
contribute  it  to  railroad  companies  is  as  much  a  cost  as 
to  contribute  the  equivalent  in  money.^ 

As  a  consequence  of  the  land  grant  policy,  capital  was 
diverted  to  transportation  purposes  which  might  have 
yielded  larger  returns  in  agriculture  or  in  manufactures. 
In  so  far  as  the  poHcy  had  this  effect,  it  lessened  rather 
than  increased  national  prosperity.  Because  of  the 
land  grant  poHcy,  also,  population  tended  to  be  diverted 
towards  the  Middle  and  Far  West,  while  there  was  still 
room  in  the  East,  South,  and  Central  States.  As  a  re- 
sult of  this  diffusion  of  population,  goods  were  probably 
carried  by  rail  over  longer  distances  than  would  have 
been  necessary  had  population  been  for  a  time  more 
concentrated  and  had  its  extension  westward  been  more 
gradual.  Had  the  westward  movement,  except  that  by 
water  to  the  Pacific  Coast,  been  slower,  a  shorter  con- 
nection could  have  been  kept  by  the  near  frontier  with 
the  more  densely  settled  parts  of  the  country,  and  the 
necessity  of  long  hauls  of  meager  traffic  through  un- 
developed sections  could  have  been,  in  part,  avoided. 
It  is  doubtless  true  that  some  sections  of  the  West  are 
exceptionally  rich  and  fertile,  as  some  are  exceptionally 
mountainous  or  arid.  That  the  former  should  event- 
ually hold  a  large  population  was  both  unavoidable  and 
desirable."  But  that  the  movement  westward  should 

1  See,  however,  considerations  later  in  this  section,  especially  in  footnote. 


ENCOURAGEMENT   OF   TRANSPORTATION     333 

have  been  artificially  hastened,  at  the  cost  of  millions 
of  acres  of  the  public  domain,  at  the  cost  of  diverting 
labor  from  other  industries  into  transportation,  at  the 
cost  of  unnecessary  distances  in  transportation,  and  at 
the  cost  of  building  railroads  in  advance  of  traffic,  ought 
not  to  be  too  readily  taken  for  granted. 

As  some  parts  of  the  country  presumably  gained  by 
the  policy,  so  other  parts  probably  lost  wealth.  Many 
of  the  eastern  farmers,  for  instance,  found  themselves 
disadvantaged  by  competition  with  producers  of  the 
West.  So  far  as  western  farmers,  by  virtue  of  natural 
advantages,  were  able  to  undersell  the  farmers  of  the 
East,  the  result  was  economical  and  beneficial.  But  so 
far  as  western  farmers  were,  in  effect,  given  bounties, 
by  having  transportation  provided  in  part  at  national 
expense,  the  result  may  very  well  have  been  a  national 
loss.  If  the  prosperity  of  the  government-aided  western 
farmer  was  increased,  that  of  the  eastern  farmer  was 
decreased.  If  the  value  of  western  land  was  raised,  that 
of  eastern  land  was  lowered.^ 

One  type  of  municipal  or  local  aid  deserves  particular 
mention.  This  is  aid  which  is  made  conditional  on  the 
choice  of  a  route  through  the  town  or  city  giving  it. 
Such  aid  introduces  an  uneconomical  basis  (from  the 
social  point  of  view)  of  calculation  into  the  choice  of  a 
route.     The  route  selected  is  less  apt  to  be  the  one  which, 

1  To  the  argument  that  the  government  so  raised  the  value  of  the  remainder 
of  its  own  land,  it  can  be  answered  that  it  is  not  the  business  of  a  government 
to  depreciate  the  land  of  citizens  in  order  to  raise  the  value  of  public  land.  If 
the  principle  that  land  rent  is  largely  a  social  product  and  belongs  mainly  to 
the  whole  people  were  commonly  accepted,  depreciating  some  land  to  raise  the 
value  of  other  land  would  appear  clearly  to  be  uneconomical.  It  is  probable, 
in  the  case  under  discussion,  that  enough  railroads  would  soon  have  been  built, 
and  that  the  government,  even  in  the  narrow  sense  here  used,  lost  more  than  it 
gained  by  making  the  grants. 


334    TRANSPORTATION   COSTS  OF   COMMERCE 

all  matters  of  trafl&c  and  expense  considered,  is  most 
profitable,  and,  therefore,  socially  most  desirable,  but  is 
apt,  rather,  to  be  a  route  favored  by  the  largest  promises 
of  local  aid. 

§9 

Summary 

Let  us  now  briefly  restate  the  principles  set  forth  in 
this  chapter,  regarding  government  interference  with 
and  encouragement  of  transportation.  Navigation  laws 
were  first  considered.  These  laws  attempt  to  develop 
the  national  merchant  marine  by  excluding  foreign  ships 
from  certain  trade.  The  United  States  excludes  foreign 
vessels  from  the  coasting  trade.  Considered  from  the 
purely  economic  viewpoint,  these  laws  are  analogous  to 
protection,  and  for  similar  reasons  they  are  economically 
undesirable. 

Shipping  subsidies  are  in  the  nature  of  bounties.  In 
general  it  may  be  said  that  they  are  without  economic 
justification.  It  may  be  defensible,  however,  or  even 
desirable,  to  make  definite  payments  to  certain  lines  of 
ships,  in  order  to  have  a  claim  to  vessels  as  naval  reserves, 
or  for  the  government  itself  to  own  and  operate  such  vessels. 
Subsidies  may  be  indirect,  as  when  certain  privileges  are 
given  to  a  nation's  own  merchant  vessels,  at  the  tax- 
payers' expense,  which  are  denied  to  the  ships  of  other 
nations.  The  purpose  of  discriminating  subsidies,  direct 
or  indirect,  is  not  so  much  to  increase  commerce  as  to 
have  it  carried  in  vessels  of  the  subsidy-paying  country. 

Facilities  for  transportation  are  frequently  provided 
by  government  at  the  taxpayers'  expense.  These  tend 
to  stimulate  commerce  which  is  not  worth  the  expense 
borne,  and  which  could  not  pay  this  expense.     Such  a 


ENCOURAGEMENT  OF  TRANSPORTATION     335 

policy  is  unfair  to  the  general  tax-paying  public  and  vio- 
lates the  principle  thatihose  who  gain  by  any  facilities 
should  be  the  ones  to  pay  for  them.  Such  provision  of 
commercial  facilities  at  public  expense  would  have  been 
the  carrying  out  of  the  plan  to  allow  United  States  coast- 
ing vessels  to  use  the  Panama  Canal  free.  Such  provi- 
sion of  facilities  at  public  expense  is  the  plan  to  have  the 
Erie  Canal  forever  free  from  tolls.  Sections  of  the  coun- 
try, or  of  the  state  of  New  York,  which  have  little  or 
nothing  to  gain  by  the  creation  of  these  facilities,  would 
have  been,  or  will  be,  taxed  that  other  sections  might  use 
them  toll  free.  The  Federal  policy  of  harbor  and  river 
improvement  is  also  a  policy  of  subsidizing  commerce, 
and  is,  therefore,  popular  with  and  favored  by  the  in- 
terests subsidized.  Like  the  protective  tariff  policy, 
the  policy  of  subsidizing  water  transportation  is  partly 
the  result  of  bargaining  between  representatives  of  dif- 
ferent districts,  each  trying  to  get  something  at  the  general 
expense.  The  British  system  of  a  public  harbor  trust 
avoids  private  monopoly  of  facilities,  but  makes  the 
traffic  using  the  faciUties  provided,  pay  for  them. 

Land  grants  to  railways,  like  other  aids  to  water  trans- 
portation, are  indirect  subsidies  given  to  commerce,  and, 
as  such,  are  open  to  objections.  The  general  rule  which 
it  is  safest  for  government  to  follow,  is  that  those  who 
chiefly  benefit  by  facilities  provided  for  commerce  should 
chiefly  pay  for  them,  rather  than  that  these  facilities 
should  be  paid  for  by  the  people  in  general,  without 
regard  to  proportionate  benefits  received. 


INDEX 


Accounting,  system  of,  prescribed  for 
transportation  companies  by  Inter- 
state Commerce  Commission,  lo  n., 

211. 

Advertising  value  of  national  merchant 
marine,  question  of,  303-304. 

Agreements,  between  railroad  com- 
panies, for  maintenance  of  rates,  71- 
72;  made  illegal,  72-73;  arguments 
for,  when  properly  supervised,  74- 
75,  103;  between  navigation  com- 
panies, 75-81 ;  governmental  regu- 
lation of,  81-83,  200-201. 

Alabama  Midland  Case,  108-110; 
standard  for  determining  rates 
applied  in,  222;  comparative  size 
of  cities  a  factor  in  defense  of  rail- 
road in,  262. 

Anti-pass  clauses  of  Interstate  Com- 
merce Law,  208,  215. 

Anti-trust  Law  of  i8go,  monopoly 
rates  prevented  by,  72,  73;  appli- 
cation of,  to  combinations  and  agree- 
ments of  navigation  companies,  81. 

Armour  Car  Lines  v.  Southern  Pacific 
Company,  decision  of  Interstate 
Commerce  Commission  in,  296. 


B 


Ballast  cargo,  low  rate  of  transporta- 
tion for,  162. 

Basing-point  system,  uneconomy  of 
the,  io8-iii. 

Bauer,  article  on  "Returns  on  Public 
Service  Properties,"  cited,  173. 

Blanket  rates,  limited  application  of, 
permitted  by  Interstate  Commerce 
Commission,  246-251. 

Blind  billing,  discrimination  by  means 
of,  176,  177-170. 

Boston,  ruling  of  Interstate  Commerce 
Commission  on  rates  to,  as  compared 
with  New  York,  244-245,  276-277. 


Brown,  H.  G.,  articles  by,  cited,  68, 
170  n. 

Bulk  of  freight,  an  element  for  consid- 
eration in  lixing  of  rates,  161. 


Canals,  comparative  importance  of 
general  expenses  and  fixed  charges 
on  railroads,  natural  waterways, 
and,  29-3 1 ;  free  use  for  navigation, 
of  government-built,  312  ff. ;  rail- 
roads cheaper  than,  317;  cases 
where  building  of,  may  pay,  317-318. 

Carload  shipments,  discrimination  in 
rates  on,  iio-iii;  rates  may  prop- 
erly be  lower  on,  than  on  small  lots, 
182. 

Carver,  The  Distribution  of  Wealth, 
cited,  13  n.,  68. 

Chattanooga  case,  decision  of  Inter- 
state Commerce  Commission  in, 
270-271. 

Choice  of  route,  aid  given  railroads 
by  local  interests,  conditional  on, 
333-334- 

Cincinnati  Freight  Bureau  case,  ruling 
of  Interstate  Commerce  Commission 
in,  221;  cost  of  service  a  factor  in 
decision  of,  225  ;  problem  of  natural 
advantages  of  location  involved  in, 
255-257. 

Cities,  comparative  size  of,  in  relation 
to  long  and  short  haul  clause,  262-263. 

Clayton  Act,  effect  of,  on  devices  for 
checking  competition,  72. 

Coal,  blanket  rate  applied  to  transpor- 
tation of,   247-248. 

Coal  companies,  discrimination  by 
transportation  lines  in  favor  of 
certain,  183-185;  ruling  of  Inter- 
state Commerce  Commission  con- 
cerning, 293-295. 

Coal  mines,  provisions  of  Hepburn  Law 
concerning  railroad  ownership  of, 
207-208. 


337 


338 


INDEX 


Coasting  trade,  Federal  law  regarding, 
2Q9 ;  uneconomy  of  government 
interference  with,  300-301 ;  free  use 
of  Panama  Canal  by,  310,  312-313. 

Colorado  Fuel  and  Iron  Company  v.  The 
Southern  Pacific  Company  et  al.,  case 
of,  257-25g. 

Commercial  ethics,  ideals  of,  violated 
by  discrimination  among  shippers, 
185-191. 

Commissions  established  by  states  to 
supervise  intrastate  rates,  196-197. 

Commodity  Clause  of  Hepburn  Act 
of  igo6,  185  n.,  207. 

Competition,  of  transportation  com- 
panies, 37  ff. ;  of  diflferent  companies 
over  the  same  route,  37;  of  routes, 
37-40;  desirability  of  stimulus  of, 
48;  of  directions,  50-61;  of  loca- 
tions, 61-64 ;  against  potential  local 
self-suflBciency,  64-65  ;  difference  be- 
tween monopoly  rates  and  com- 
petitive rates,  66-68;  devices  for 
checking,  and  laws  against,  71- 
73 ;  reasons  why  not  necessarily 
ruinous,  73 ;  devices  for  preventing, 
in  water  transportation,  75-86;  a 
cause  of  discrimination  in  rates, 
among  places,  94-96;  discrimina- 
tion among  places,  due  to  competi- 
tion of  a  railroad  with  a  water  line, 
132-143 ;  illegitimate,  sometimes 
practiced  by  railroads  against  water 
lines,  143 ;  discrimination  among 
shippers  caused  by,  180-182 ;  be- 
tween railroads,  not  regarded  by 
Interstate  Commerce  Commission  a 
suflScient  reason  for  discrimination 
in  rates  between  two  places,  264- 
267. 

Conference  lines,  agreements  among, 
to  secure  monopoly  in  water  trans- 
portation, 77-83. 

Construction  costs,  influence  of,  on 
railroad  rates,  20-22. 

Com  and  corn  meal,  relation  of  rates 
on,  285-286. 

Cost  of  carrying,  an  element  in  fixing 
of  rates,  161;  reasonable  rates  as 
tested  by,  224-226. 

Court  of  Commerce,  brief  existence  of, 
215-216. 

Cowpeas,  rates  on,  as  compared  with 
fertilizer,  283-284. 


D 


Danville,  Va.,  case,  decision  of  Inter- 
state Commerce  Commission  in,  226; 
factor  of  physical  value  of  railroad 
property  in,  235-236 ;  theory  under- 
lying decision  of  Interstate  Com- 
merce Commission  in,  264-265. 

Davenport,  H.  J.,  cited,  131  n. 

Decreasing  cost,  extent  of  application 
of  law  of,  to  railroad  business,  13-14. 

Deferred  rebate  system,  a  device  for 
checking  competition  in  water  trans- 
portation, 78-79. 

Detroit,  ruling  of  Interstate  Com- 
merce Commission  on  rates  to 
and  from,  as  compared  with  Chicago, 

245- 

Directions,  competition  of,  50  £f. ; 
competition  of,  involving  ocean 
carriers,  59-60;  discrimination  be- 
tween, sometimes  economically  de- 
sirable, 153-156. 

Discrimination,  competition  as  a 
cause  of,  among  places,  94-96; 
economic  loss  which  may  flow 
from,  among  places,  97-103 ;  im- 
economy  of,  either  in  favor  of  or 
against  imports,  103-108;  un- 
economy of  the  basing-point  system, 
108-111;  in  favor  of  intrastate  busi- 
ness, resulting  from  orders  of  state 
commissions,  112-115;  by  a  trans- 
portation company  in  favor  of  trafiic 
moving  a  long  distance  over  its 
own  lines,  11 5-1 17;  cases  where 
economically  defensible,  among 
places,  120  ff. ;  by  the  longer  or 
longest  line,  when  there  is  competi- 
tion of  directions  or  of  locations,  127- 
131 ;  by  the  shorter  or  shortest  Une, 
when  such  a  hne  has  comparatively 
light  tralBc,  130-132  ;  among  places, 
by  a  railroad  competing  with  a 
water  line,  132-143  ;  among  places, 
by  a  railroad  competing  with  local 
self-sufBciency,  144-145  ;  in  favor  of 
export  traflic,  145-153;  between 
two  opposite  directions,  153-156; 
question  as  to  whether  economically 
desirable,  among  different  kinds 
of  goods,  160-173;  among  shippers, 
175  fl. ;  methods  of  practicing  and 
of  concealing,  among  shippers,  lys-" 


INDEX 


339 


i8o;  caused  by  competition  of 
transportation  lines,  180-182  ;  penal- 
ized by  Elkins  Law,  182;  various 
causes  of,  amonj;  shippers,  18,5-185; 
practice  of,  among  shippers,  tested 
by  principles  of  industrial  and  com- 
mercial ethics,  185-101 ;  analogy 
between  protective  tariff  and,  189; 
forbidden  by  Interstate  Commerce 
Act  of  1887,  199-201 ;  provisions  of 
amendment  of  1906  (Hepburn  Law), 
206-209 ;  rulings  of  Interstate 
Commerce  Commission  on,  between 
places,  244-280;  rulings  of  Interstate 
Commerce  Commission  on,  among 
different  goods  and  among  shippers, 
281  ff. ;  devices  for  discrimination 
between  shippers,  290-297. 
Distance,  difference  in,  a  factor  in  rate- 
making,  244-246. 


Earnings  of  railroads  as  a  test  of 
reasonable  rates,  226-233. 

Eau  Claire  lumber  case,  200 ;  ruling  of 
Interstate  Commerce  Commission 
in,  251-255. 

Efficiency,  effect  on,  of  discrimination 
among  shippers,  187. 

Efficiency  in  operation  of  railroads, 
premium  to  be  placed  on,  90-91. 

Elkins  Law,  effect  of,  on  competition, 
75 ;  provisions  of,  concerning  dis- 
crimination among  shippers,  182, 
201-202 ;  strengthened  by  Hep- 
bum  Law  of  1906,  208-209. 

England,  navigation  laws  of,  299. 

Erie  Canal,  uneconomy  of  enlarge- 
ment of,  at  government  expense, 
316-317. 

Expenses  of  railroads,  analysis  of, 
3-25 ;  comparative  importance  of 
general  expenses  and  fixed  charges 
on  railroads,  on  natural  waterways, 
and  on  canals,  29-31. 

Expenses  of  water  transportation, 
classification  of,  25  ff. ;  those  which 
pertain  to  movement  of  traffic, 
25-26;  terminal  expenses,  26; 
general  expenses,  26-27 ;  fixed 
charges,  27-29. 

Explosives,  an  example  of  goods  for 
which    higher    transportation    rates 


can  be  charged  than  for  other  goods, 
161. 

Export  Rate  case,  164;  position  taken 
by  Interstate  Commerce  Com- 
mission in,  concerning  competitive 
rates  on  export  traffic,  277-278; 
element  of  relative  rates  on  raw 
material  and  finished  product  in, 
284. 

Export  trade,  competition  of  indirect 
routes  for,  46 ;  competition  of  direc- 
tions illustrated  by,  from  United 
States  to  South  and  East  Afri- 
can ports,  59-60;  distinction  be- 
tween discriminating  rates  in  favor 
of,  and  sales  at  lower  prices  abroad 
of  tariff-protected  American-made 
goods,  148  n. 

Express  companies,  placed  under  au- 
thority of  Interstate  Commerce  Com- 
mission, 206. 

F 

False  billing,  discrimination  by  means 
of,  176,  177. 

Fertilizers,  relative  rates  on  cowpeas 
and,  283-284. 

Fighting  ships,  use  of,  to  prevent 
competition  in  water  transportation, 
80-81. 

Finished  products,  proper  relation  of 
rates  on,  to  rates  on  raw  materials, 
164-165,  284-287. 

Fisher,  Irving,  Elementary  Principles 
of  Economics,  cited,  9  n.,  17. 

"  Five  Per  Cent  Case,"  cited,  89, 
90,  91. 

Fixed  charges,  as  one  class  of  railroad 
expenses,  10;  what  is  included  in, 
lo-ii;  relative  importance  of, 
11-12;  independence  of  traffic,  12; 
relative  magnitude  of,  12-13;  ques- 
tion of  influence  of,  on  railroad 
rates,  18-24 !  relation  of,  to  expenses 
and  rates  of  water  transportation, 
27-29;  comparative  importance  of 
general  expenses  and,  on  railroads, 
on  natural  waterways,  and  on 
canals,  29-31 ;  may  be  an  element  in 
making  carriage  of  goods  by  a  round- 
about route  economically  justifiable, 
41. 

Flour,  relative  rates  for  carrying  wheat 
and,  164-165,  284-285. 


340 


INDEX 


Free  Transportation,  regulation  of,  by 
Interstate  Commerce  Act  of  1887 
and  Hepburn  Law,  20S ;  changes  in 
laws  as  to,  by  amendment  of  Inter- 
state Commerce  Law  in  1910,  215. 

Fuller,  Herbert  Brace,  article  on 
"American  Waterways  and  the  Pork 
Barrel,"  cited,  324,  326. 

Furniture,  relative  rates  on  finished 
and  unfinished,  286. 


General  expenses,  what  is  included  in, 
in  case  of  railroads,  8-10 ;  influence 
of,  in  determining  railroad  rates, 
16-18;  relation  of,  to  expenses  and 
rates  of  water  transportation,  26- 
27 ;  comparative  importance  of 
fixed  charges  and,  on  railroads,  on 
natural  waterways,  and  on  canals, 
29-31. 

Germany,  conclusions  from  study  of 
waterway  system  of,  318. 

Government,  function  of,  in  relation 
to  transportation  monopoly,  87-92 ; 
uneconomical  interference  with  and 
encouragement  of  transportation 
by,  299  fi. ;  enactment  of  naviga- 
tion laws  by,  299-301 ;  subsidies  to 
native  shipping  by,  301-306;  argu- 
ments for  and  against  operation  of 
merchant  ships  by,  307-310;  giving 
of  indirect  subsidies  by,  favoring  na- 
tive ships,  310-312;  free  use  for 
navigation  of  canals  built  by,  312- 
319;  wrong  policy  followed  in  im- 
provement of  harbors,  maintenance 
of  lighthouses,  etc.,  by,  319-323; 
improvement  of  rivers  by,  323-328; 
subsidies  to  railroads  by,  328-334. 

Government-owned  railroads,  discrim- 
ination in  favor  of  or  against  im- 
ports by,  107. 

Granger  Cases,  decision  of  Supreme 
Court  in,  193. 

Great  Britain,  system  of  harbor  im- 
provement and  maintenance  in,  321- 
323. 

H 

Hadley,  Economics,  cited,  188;  Rail- 
road Transportation,  cited,  17,  19, 
66,  71,  74,  169. 


Haney,  A  Congressional  History  oj 
Railways  in  the  United  States,  cited, 

329- 
Harbors,  national  economic  loss  from 
government's     bearing     burden     of 
improvement   and   maintenance   of, 
319-321 ;  British  system  relative  to, 

321-323- 

Harbor  trusts  in  Great  Britain,  86, 
321-323. 

Hepburn  Law  of  1906,  authority  of 
Interstate  Commerce  Commission 
extended  by,  206;  provisions  of, 
206-212. 

Holding  companies  prohibited  under 
Clayton  Act,  72. 

Howell  milk  case,  ruling  of  Interstate 
Commerce  Commission  in,  246- 
247. 

Huebner,  "Report  on  Steamship  Agree- 
ments and  Affiliations  in  the  Ameri- 
can Foreign  and  Domestic  Trade," 
cited,  59,  77,  78,  79,  80,  81,  83,  84, 
97.  175- 


Import  Rate  case,  attitude  of  Inter- 
state Commerce  Commission  con- 
cerning rates  on  import  traffic  shown 
by,  276. 

Import  trade,  competition  of  indirect 
routes  for,  46;  uneconomy  of  dis- 
crimination in  rates  either  in  favor  of 
or  against,  103-108. 

Industrial  morality,  ideals  of,  violated 
by  discrimination  among  shippers, 
185-191. 

Industrial  railroads,  as  a  device  for 
discriminating  among  shippers,  179- 
180;  jurisdiction  of  Interstate 
Commerce  Commission  extended 
over,  206-207  ;  niUngs  of  Interstate 
Commerce  Commission  concerning, 
292-293. 

Inland  Waterways  Commission,  Re- 
port of,  cited,  143. 

Intermountain  Rate  cases,  141,  213. 

International  Harvester  Company, 
terminal  railroad  device  employed 
by,  179-180,  292-293. 

Interstate  Commerce  Commission, 
classification  of  railroad  expenses 
made  by,  10  n. ;  decisions  of,  con- 
cerning rates  on  import  and  export 


INDEX 


341 


trade,   47 ;    rulings  on  competition 
of  roundabout  routes,  47  ;   power  of, 
to  decide  in  each  case  of  deviation 
from  long  and  short  haul  rule,  4Q ; 
protection   given    by,    against   evils 
of  monopoly  of  rail  competition,  75 ; 
quoted  concerning    premium  to  be 
placed  on  efficiency,  gi ;    power  of, 
to  deal   with   the   relation   between 
intrastate  and  interstate  rates,  115; 
ruling    as    to    discrimination    by    a 
transportation    company    in    favor 
of   traflSc   moN'ing   a   long   distance 
over  its  own  lines,  116,  117;   should 
exercise  its  power  to  relieve  certain 
roundabout  lines  of  requirements  of 
long    and  short    haul    clause,    126; 
decision  of,  concerning  water  com- 
petition,    in     St.     Louis     Business 
Men's  League  case,  138-13Q;  power 
of,  to  correct  discrimination  in  favor 
of  exports,   146  n.;    jurisdiction  of, 
over  cases  of  discrimination  among 
shippers,    182;     Special    Report   on 
Discrimination   and    Monopolies   in 
Coal    and    Oil,     cited,     183,     184; 
make-up,  duties,  terms  of  members, 
etc.,    as    prescribed    by    Interstate 
Commerce  Act  of  18S7,  202;  weak- 
ness  of,    in    original    form,    in    not 
being  able  to  enforce  orders  directly, 
202-203 ;    enforcement  of  orders  of, 
under  provisions  of  Hepburn  Law, 
209-210;     provisions    of    Hepburn 
Law    as    to    number    of    members, 
terms  of  ofSce,   and   salaries,    212; 
legislation  of  191 2  and  1913  concern- 
ing,    216-217;     rulings    of,    as    to 
reasonable   rates,    219-241;    rulings 
on     discrimination     among    places, 
244-280;    rulings  on  discrimination 
among  dififerent  goods  and   among 
shippers,      281-298;      Reports     of, 
cited,  39,  47,  58,  63,  89,  90,  104,  109, 
no,  116,  117,  138,  141,  142,  146,  162- 
165,    175,    179,    199.    200.    205-209, 
213,  221-227,  232-238,  241,  244-247, 
249,  251,  2SS  il.,  262,  264,  269-271, 
276,  277,  281,  283-296. 
Interstate  Commerce  Law,  agreements 
between    rival    railroad    companies 
made  illegal  by,  72,  75;   applied  to 
water  transportation  companies,  82  ; 
provisions    prohibiting    discrimina- 


tion in  rates  among  places,  102 ; 
illegitimate  competition  of  railroads 
against  water  lines  penalized  by, 
143  ;  discrimination  among  shippers 
made  illegal  by,  182;  provisions  of, 
as  passed  in  1887,  199-205;  weak- 
nesses of,  in  original  form,  202-205 ; 
the  amendment  of  1906  (Hepburn 
Law),  205-212;  provisions  of  amend- 
ment of  1910,  212-216. 

Intrastate  business,  discrimination  in 
favor  of,  resulting  from  orders  of 
state  commissions,  112-115. 

Intrastate  rates,  relation  of,  to  inter- 
state rates,  under  control  of  Inter- 
state Commerce  Commission,  115. 


Johnson,  American  Railway  Transpor- 
tation, cited,  so,  71,  72,  73,  329; 
Ocean  and  Inland  Water  Transporta- 
tion, cited,  319,  323. 

Joint  costs  of  traffic,  railroad  expenses 
classified  as,  8-9;  complexity  of 
railroad  rate-regulating  problem 
added  to  by  factor  of,  219. 


Land.    See  Real  estate. 
Land  grants,   subsidizing  of  railroads 
by,  329 ;  policy  of,  open  to  objections, 

329-333- 

Lighthouse  maintenance,  Federal  ex- 
penditures for,  319;  expense  of, 
should  be  borne  by  those  benefited, 
320;  British  plan,  321-323. 

Lindsay,  History  of  Merchant  Shipping, 
cited,  299. 

Local  self-sufficiency,  competition  of 
railroads  against,  64-65  ;  discrimina- 
tion among  places  by  a  railroad 
competing  with,  144-145. 

Location,  undue  preference  to,  for- 
bidden by  Interstate  Commerce 
Act  of  1887,  199;  every  place  en- 
titled to  natural  advantages  of,  246- 

257- 

Locations,  competition  of,  61-64. 

Long  and  short  haul  clause,  provisions 
of,  under  Interstate  Commerce 
Act  of  1887,  200;  as  amended  in 
1910,  212;    and  water  competition. 


342 


INDEX 


212-214,  271-275;  and  compara- 
tive size  of  cities,  262-263 ;  and 
discnmination  by  the  longer  or 
longest  line,  263-267  ;  and  "market" 
competition,  267-269;  in  its  proper 
application  to  a  direct  line  with 
light  traffic  competing  with  a  more 
roundabout  line  having  dense  traffic, 
269-271. 

Lorenz,  M.  O.,  article  by,  cited,  140  n. 

Los  Ajigeles,  discrimination  in  favor  of, 
on  account  of  size,  262-263.  I 

Lumber,  competition  of  locations  illus- 
trated by  transportation  of,  63-64. 

M 

McAdoo,  William  G.,  bill  for  govern- 
ment operation  of  merchant  ships 
outlined  by,  307. 

McPherson,  Railroad  Freight  Rates, 
cited,  38,  65. 

Management,  relation  of  efiSciency  of, 
to  reasonable  rates,  240-241. 

Market  competition,  long  and  short 
haul  clause  and,  267-269. 

Market  value  of  securities,  not  a 
satisfactory  standard  for  rate  fixing, 
91. 

Marshall,  Principles  of  Economics, 
cited,  22,  89  n. 

Maximum  Rate  Case,  decision  of 
Supreme  Court  in,  204. 

Maximum  rates  for  transportation, 
attempt  of  Interstate  Commerce 
Commission  to  fix,  prevented  by 
decision  of  Supreme  Court,  204; 
Commission's  right  to  fix,  conferred 
by  Hepburn  Law  of  1906,  209; 
extension  of  Commission's  power  to 
fix,  by  amendment  of  19 10,  214; 
provisions  of  Panama  Canal  Act  of 
191 2  relative  to,  216. 

Meeker,  History  of  Shipping  Subsidies, 
cited,  303,  305,  306. 

Merchant  ships,  government  operation 

of,  307-310- 
Meyer,  H.  R.,  Government  Regulation  of 

Railway  Rates,  cited,  107,  108. 
"Midnight  tariffs,"   210. 
Military    arguments     for    subsidizing 

of  merchant   marine,   304-305 ;    for 

government  operation  of  merchant 

ships,  309 


Milk,     rulings    of     Interstate     Com- 
merce    Commission    on     rates    for 
carrying,   246-247,   249-251. 
Mill,     J.    S.,    Principles    of    Political 

Economy,    cited,     1S6. 
Milwaukee,  ruling  of  Interstate  Com- 
merce Commission  on  rates  on  grain 
to,  259-261. 
Minnesota    Rate     case,    decision     of 

Supreme  Court  in,  197-198. 
Mismanagement      of      transportation 
company,    governmental    regulation 
not  to  be  aSected  by  element   of, 
89. 
Mississippi    River,    improvement    of, 

by  Federal  government,  323-324. 
Monopolies,  built  up  by  discrimination 

among  shippers,  185-186. 
Monopolistic  transportation  rates,  eco- 
nomic objections  to,  33-34 ;  higher  in 
proportion    to    distance    or    service 
rendered,    than    competitive    rates, 
67-68;      may     prevent     commerce 
which  is  economically  desirable,  68; 
devices  for   securing,  71-72;     made 
illegal,  72. 
Monopoly,    devices    for    securing,    in 
water  transportation,  75-86;    func- 
tion of  government  in  relation  to,  87- 
92. 
Moulton,  Waterways  versus  Railways, 
cited,  318,  319. 

N 

Naval  reasons,  as  argument  in  favor 
of  shipping  subsidies,  305-306; 
for  government  operation  of  merchant 
ships,  309. 

Navigation  companies,  agreements 
among,  and  governmental  regula- 
tion of,  75-83  ;  agreements  between 
railway  companies  and,  83-84; 
rate  discrimination  between  places 

by,  97- 

Navigation  laws,  in  England  and 
America,  299  ;  constitute  uneconom- 
ical government  interference  with 
transportation,  300-301. 

Noyes,  American  Railroad  Rales,  cited, 

so. 

P 

Pacific  Coast  points,  discrimination  in 
favor  of,  138-139;    ruling  of  Inter- 


INDEX 


343 


state     Commerce     Commission     on 
rates  to,  212-214. 

Panama  Canal,  free  use  by  American 
ships  equivalent  to  a  money  sub- 
sidy, 310-312;  economic  effects 
of  tolls  exemption  for  American 
coasting  vessels,  313-316. 

Panama  Canal  Act  of  1912,83;  effect 
on  railroad  ownership  of  vessels, 
86,  201,  217;  authority  of  Inter- 
state Commerce  Commission  ex- 
tended by,  216. 

Passes  on  transportation  lines,  regu- 
lation of,  by  Interstate  Commerce 
Act  of  1887  and  Hepburn  Law, 
208;  changes  in  provisions  con- 
cerning, by  amendment  of  Interstate 
Commerce  Law  in  1910,  215. 

Pearline,  rates  on,  as  compared  with 
laundry  soap,  281 ;  bearing  of  water 
competition  on,  287-288. 

Pennsylvania  Railroad  system,  dis- 
crimination in  favor  of  coal  com- 
panies by,  183-184. 

Physical  valuation  of  railroads,  pro- 
vided for  by  law  of  1913,  217; 
reasonable  rates  in  relation  to,  234- 
240. 

Pigou,  cited  concerning  theory  that 
railroad  transportation  is  a  business 
of  joint  costs,  9  n. ;  article  on  "Rail- 
way Rates  and  Joint  Costs,"  cited, 
170. 

Pipe  lines,  under  authority  of  Inter- 
state Commerce  Commission,  206. 

Plate  glass,  discrimination  in  rates 
practiced  against  domestic,  104. 

Pooling  devices  adopted  by  railroad 
companies,  71-72;  laws  passed 
against,  72-73  ;  arguments  for,  when 
properly  supervised,  74-75 ;  desira- 
bility of,  under  some  circumstances, 
when  supervised  by  Interstate  Com- 
merce Commission,  103 ;  provisions 
of  Interstate  Commerce  Act  of  1887 
concerning,  200-201. 

"Pork  barrel"  system  of  waterway 
development,  326. 

Poughkeepsie,  ruling  of  Interstate 
Commerce  Commission  on  rates 
from,  as  compared  with  western 
points,  245-246. 

Preferential  agreements  between  rail- 
way and  steamship  lines,  S3-84. 


Private  car  lines,  placed  under  au- 
thority of  Interstate  Commerre 
Commission,  206;  ruling  of  Inter- 
state Commerce  Commission  con- 
cerning, 293-296. 

Producing  corporations,  discrimination 
arising  from  railroad  ownership  of, 
183-185;  provisions  of  Hepburn 
Law  of  1906  concerning,  207-208. 

Protective  tariff,  rate  discriminations 
analogous  to,  loi,  105,  112-115,  189; 
.superficial  resemblance  of  discrimina- 
tion in  favor  of  e.xport  traffic  to 
sale  abroad  at  lower  prices  of  goods 
protected  by,  148  n.;  analogy 
between  navigation  laws  and,  300- 
301 ;  shipping  subsidies  compared 
to,  301,  304-305;  government  im- 
provement of  waterways  compared 
to,  327. 

R 

Railroad  building,  subsidies  to,  328- 
333 ;  grants  for,  by  local  interests, 
conditional    upon    choice   of    route, 

333-334- 
Railroads,  analysis  of  expenses  of, 
3  ff. ;  four  classes  of  expenses,  5 ; 
expenses  for  production  of  train 
mileage,  6-8;  terminal  expenses,  8; 
general  expenses,  8-10;  classifica- 
tion of  expenses  made  by  Interstate 
Commerce  Commission,  10  n. ; 
fixed  charges  or  sunk  costs,  10-13  I 
extent  to  which  law  of  decreasing 
cost  applies  to  business  of,  13-14; 
influence  of  four  classes  of  expenses 
on  determination  of  rates,  14  ff. ; 
intluence  of  expenses  for  production 
of  train  mileage,  14-15  ;  influence  of 
terminal  expenses,  15-16;  influence 
of  general  expenses,  16-18;  influence 
of  fLxed  charges  or  sunk  costs,  18-24 ; 
effect  of  degree  of  utilization  of  rail- 
road capital,  24-25 ;  comparative 
importance  of  general  expenses 
and  fixed  charges  on,  and  on  natural 
waterways  and  canals,  29-31 ;  pref- 
erential agreements  between  steam- 
ship Hues  and,  83-84;  legislation 
concerning  competition  of,  with 
water  lines,  86,  201,  217;  econom- 
ically undesirable  rate  discrimina- 
tion    among     places     by,     94-96; 


344 


INDEX 


economic  loss  which  may  flow  from 
discrimination  by,  among  places, 
97-103 ;  uneconomy  of  discrimina- 
tion by,  either  in  favor  of  or  against 
imports,  103-108;  when  discrimina- 
tion among  places  by,  is  economi- 
cally justifiable,  1 20  fi. ;  discrimina- 
tion among  places,  by  a  roundabout 
line,  120-127;  discrimination  by  the 
longer  or  longest  line,  when  there  is 
competition  of  directions  or  of  loca- 
tions, 127-130;  discrimination  by 
the  shorter  or  shortest  line,  when 
such  a  line  has  comparatively  light 
traflSc,  130-132 ;  discrimination 
among  places,  by  railroads  compet- 
ing with  water  lines,  132-143 ;  il- 
legitimate competition  practiced  by, 
against  water  lines,  143  ;  discrimina- 
tion among  places  by  a  railroad 
competing  with  local  self-sufficiency, 
144-145 ;  discrimination  in  favor 
of  export  traffic,  145-153;  possible 
loss  to,  from  carrying  discrimination 
in  favor  of  exports  too  far,  151-152  ; 
discrimination  between  two  opposite 
directions  by,  economically  desirable 
within  certain  limits,  153-156;  dis- 
crimination among  different  kinds 
of  goods,  160-173 ;  discrimination 
among  shippers,  175-191;  extent 
of  governmental  power  to  regulate, 
193-195 ;  physical  valuation  of, 
provided  for  by  law  of  1913.  217; 
rulings  of  Interstate  Commerce 
Commission  as  to  reasonable  rates, 
219-243;  ruUngs  on  discriminations 
among  places,  244-280;  com- 
pared with  canals  as  to  cheapness, 
317;    compared  with  rivers,  325. 

Rate  agreements  among  railroad  com- 
panies, 71;  forbidden  by  law,  72; 
desirability  of,  under  some  circum- 
stances, when  supervised  by  Inter- 
state  Commerce    Commission,   103. 

Rates,  influence  of  the  four  classes 
of  railroad  expenses  on,  14-25 ; 
causes  which  affect,  in  water  trans- 
portation, 25-29;  economic  objec- 
tions to  monopolistic,  33-34;  effect 
of  competition  of  railroad  companies 
on,  37-40;  competition  of  transpor- 
tation companies  and,  37-70;  func- 
tion of  government  relative  to  regu- 


lation of,  87-91 ;  value  of  stocks 
and  bonds,  and  physical  valuation  of 
transportation  plant,  to  be  considered 
in  fixing,  91-92  ;  discrimination  in, 
among  places,  caused  by  competi- 
tion, 94-96;  economic  loss  which 
may  flow  from  discrimination  in, 
among  places,  97-103  ;  uneconomy  of 
discrimination  in,  either  in  favor 
of  or  against  imports,  103-108;  un- 
economy of  the  basing-point  system, 
108-111;  discrimination  in  favor 
of  intrastate  business,  resulting 
from  orders  of  state  commissions, 
1 1 2-1 15;  discrimination  by  a  trans- 
portation company  in  favor  of  traffic 
moving  a  long  distance  over  its  own 
lines,  1 1 5-1 17;  economically  de- 
fensible discrimination  in,  among 
places,  120  fi. ;  question  as  to  de- 
fensibihty  of  discrimination  in, 
among  different  kinds  of  goods, 
160-173 ;  steps  in  development 
of  regulation  of,  in  United  States, 
193  fi. ;  extent  of  governmental 
power  to  regulate,  193-195 ;  regula- 
tion of,  by  state  governments,  196- 
198 ;  ruUngs  of  Interstate  Commerce 
Commission  as  to  reasonable,  219- 
241 ;  rulings  of  Interstate  Com- 
merce Commission  on  discriminations 
among  places,  244-280;  rulings  of 
Interstate  Commerce  Commission  on 
discrimination  among  diSerent  goods 
and  among  shippers,  281-298. 

Raw  materials,  proper  relation  between 
rates  on  finished  products  and,  164- 
165,  284-287. 

Readville  case,  long  and  short  haul 
clause  and  water  competition  illus- 
trated by,  271. 

Real  estate,  principles  governing  value 
of  terminal,  22,  23;  principle 
governing  use  of,  for  canals,  31 ; 
due  allowance  for  rent  of,  to  be  made 
in  governmental  regulation  of  trans- 
portation rates,  88-89. 

Reasonableness  of  rates,  as  evi- 
denced by  comparison,  220^224; 
as  tested  by  cost  of  service,  224-226; 
earnings  as  a  test  of,  226-233; 
relation  to  fair  value  of  railroad 
property,  234-240;  efficiency  of 
management  in  relation  to,  240-241. 


INDEX 


345 


Receivers  and  Shippers'  Association  of 
Cincinnati  v.  Cincinnati,  New  Or- 
leans and  Texas  Ry.  Co.,  decision 
of  Interstate  Commerce  Commis- 
sion in,  226-232. 

Rent  of  wharf  area,  determination  of, 

31-33- 

Ripley,  W.  Z.,  Railroads,  Rates  and 
Regulation,  cited,  39,  50,  141,  169. 

Risk  in  carrying,  an  element  in  fixing 
of  rates,  161. 

Rivers,  governmental  improvement  of, 
323  fl. ;  amounts  spent  on,  323-325  ; 
railroads  compared  with,  for  cheap- 
ness of  transportation,  325;  im- 
provement of,  really  one  method  of 
subsidizing  commerce,  325  ;  politics 
and  improvement  of,  326-328;  re- 
form which  might  be  instituted,  328. 

Roundabout  routes,  generally  un- 
economic character  of  competition 
of,  39-40;  situations  which  render 
desirable  or  justifiable  carriage  of 
goods  by,  in  preference  to  shorter 
routes,  40-47  ;  rulings  of  Interstate 
Commerce  Commission  concerning, 
47,  263-267 ;  in  the  case  of  ocean 
transportation,  49 ;  economically 
defensible  discrimination  among 
places  by,  120-127. 

Routes,  competition  of,  of  transporta- 
tion companies,  37  5. 


St.  Cloud  case,  ruling  of  Interstate 
Commerce  Commission  in,  264. 

St.  Louis  Business  Men's  League  case, 
138-139. 

Salt-producing  points,  competition  of 
directions  illustrated  by,  58. 

Sanborn,  Congressional  Grants  of  Land 
in  Aid  of  Railways,  cited,  329. 

Savannah  Naval  Stores  case,  116; 
ruling  of  Interstate  Commerce 
Commission  in,  223,  258-259- 

Secret  rates,  a  means  of  discriminating 
among  shippers,  177-179;  provisions 
of  Interstate  Commerce  Act  of 
1887  concerning,  201. 

Sherman  Anti-trust  Act,  effect  of,  on 
monopoly  rates,  72;  applied  to 
agreements  between  navigation  com- 
panies, 81. 


Ship  canals,  successful  use  of,  318. 

Shippers,  discrimination  among,  I7S  ff- ! 
methods  of  practicing  and  of  conceal- 
ing discrimination  among,  175-180. 

Shipping  subsidies,  discussion  of,  301- 
306. 

Shreveport,  La.,  case,  112-115;  de- 
cision of  Supreme  Court  in,  198. 

Size  of  cities,  long  and  short  haul  clause 
and,  262-263. 

Sleeping-car  companies,  under  au- 
thority of  Interstate  Commerce 
Commission,  206. 

Smalley,  Railroad  Rate  Control,  cited, 
194. 

Smith,  J.  R.,  The  Organization  of  Ocean 
Commerce,  cited,  155,  162,  171,  321. 

Space  occupied,  an  element  for  con- 
sideration in  fixing  of  rates,  161. 

Spokane  case,  decision  of  Interstate 
Commerce     Commission     in,     226, 

271-275- 

State  governments,  rate  regulation  by, 
196-198. 

State  railroad  commissions,  rate  dis- 
crimination resulting  from  orders 
of,  112-115. 

Station  expenses.  See  Terminal  ex- 
penses. 

Steamship  lines.  See  Navigation  com- 
panies. 

Subsidies,  arguments  for  and  against, 
to  native  shipping,  301-306;  free 
use  of  Panama  Canal  by  American 
ships  one  form  of  subsidy,  310-312; 
to  railroad  building,  328-334. 

Substitutes,  rates  on  goods  which  are, 
281-284. 

Sunk  costs,  of  railroads,  11-12;  ques- 
tion of  influence  of,  on  railroad  rates, 
18-24;  in  the  case  of  water  trans- 
portation, 27-29. 

Supreme  Court,  decision  by,  concern- 
ing power  of  Congress  to  deal  with 
relation  of  intrastate  and  interstate 
rates,  as  a  relation,  115;  views  of, 
concerning  government-made  rates, 
105 ;  decisions  in  cases  involving 
rate  regulation  by  state  govern- 
ments, 197-198. 

Switching  charges,  discrimination  by 
use  of  device  of,  i8o;  regulation 
of,  by  Interstate  Commerce  Com- 
mission, 207,  293. 


346 


INDEX 


Tank  cars,  special  rates  for,  a  device  for 
discrimination  among  shippers,  177- 
178 ;  rulings  of  Interstate  Commerce 
Commission  concerning,  291-292. 

Tarbell,  Ida  M.,  The  History  of  the 
Standard  Oil  Cojnpany,  cited,  181. 

Taussig,  article  by,  cited,  9;  Prin- 
ciples of  Economics,  cited,  137. 

Telegraph  and  telephone  business, 
provisions  of  Interstate  Commerce 
Act  applied  to,  216. 

Terminal  expenses  of  railroads,  5 ; 
what  is  included  in,  8 ;  variation  of, 
with  amoimt  of  freight  and  number 
of  passengers  carried,  8;  influence 
of,  in  determining  railroad  rates, 
15-16;  influence  of,  on  expenses 
of  water  transportation,    26. 

Terminal  railroads,  employed  as  a 
device  for  discriminating  among 
shippers,  179-180;  authority  over, 
given  to  Interstate  Commerce  Com- 
mission, 206-207  ;  rulings  of  Inter- 
state Commerce  Commission  con- 
cerning, 292-293. 

Texas  Railroad  Commission,  rate  dis- 
crimination in  favor  of  intrastate 
business  resulting  from  orders  of,  112. 

"Trade  follows  the  flag"  argument 
for  shipping  subsidies,  303-304. 

Traffic  agreements  among  navigation 
companies,  75-81. 

Train  mileage,  expenses  of  railroads 
for  production  of,  6;  degree  of 
variation  of,  with  amount  of  traffic, 
7-8;  influence  of,  on  determination 
of  railroad  rates,  14-15. 

Tramp  vessels,  variation  of  expenses  of, 
with  amount  of  business,  25-26 ; 
profits  of,  not  necessarily  uniform 
in  relation  to  fixed  charges,  27-28; 
a  means  of  checking  monopoly  in 
water  transportation,  77  ;  reasonable 
rates  in  water  transportation  insured 
by  competition  of,  176. 

Transcontinental  business,  economi- 
cally defensible  discrimination  among 
places  in;  140-142;  zone  system  of 
rates  in,  271-275. 

Transportation,  cost  of,  3-36. 

Transportation  by  Water  in  the  United 
States,  Report  of  Commissioner  of 


Corporations   on,    cited,    318,    319, 
323,  328. 

U 

United  States  v.  Delaware  and  Hudson 
Company,  decision  of  Supreme  Court 
in  case  of,  207-208. 

United  States  v.  Lehigh  Valley  Railroad, 
decision  in,  208. 

Utilization  of  transportation  plant, 
relation  between  railroad  expenses 
and,  13-14;  railroad  rates  as 
affected  by  degree  of,  24-25;  as  a 
test  of  relative  rates,  165-173. 


Value  of  commodity,  element  of,  in 
rate  fixing,  169-17 1,  289-290. 

Value  of  railroad  property,  reasonable 
rates  in  relation  to,  234-240. 

W 

Water  competition,  long  and  short 
haul  clause  and,  212-214,  271-275; 
bearing  of,  on  relation  of  rates 
charged  for  carrying  different  kinds 
of  goods,    287-289. 

Water  frontage,  control  of,  by  railroad 
interests,  as  a  means  of  preventing 
competition,  84-86. 

Water  lines,  provisions  of  Panama 
Canal  Act  relating  to  railroads  and, 
86,  201,  217;  discrimination  among 
places  resulting  from  competition 
of  railroads  with,  132-143;  ille- 
gitimate competition  by  railroads 
against,  143 ;  discrimination  among 
shippers  practiced  to  a  certain  extent 
by,  175-176. 

Water  transportation,  expenses  and 
rates  of,  25-29;  roundabout  routes 
in  the  case  of,  49;  competition  of 
directions  in,  59-60;  devices  for 
preventing  competition  in,  75~86; 
rate  discrimination  between  places 
in,  97 ;  higher  rates  charged  for 
carrying  valuable  goods  in,  171. 

Waterways,  comparative  importance 
of  general  expenses  and  fixed  charges 
on  railroads,  canals,  and,  29-31 ;  un- 
economy  of  free  use  for  navigation 
of  government-built,  312-319. 


INDEX 


347 


Weight  of  goods,  an  element  in  fixing 
of  transportation  rates,  i6i. 

Wharf  charges,  proper  basis  of,  31-33- 

Wharves,  control  of  space  for,  a  means 
of  preventing  competition,  84-86. 

"What  the  traffic  will  bear,"  mean- 
ing of ,  under  monopoly  conditions  and 
under  competitive  conditions,  66-68. 

Wheat  and  Hour,  relation  of  rates  on, 
164-165,  284-285. 

Woodlock,  book  by,  cited,  3. 


Zones,  establishment  of,  in  connec- 
tion with  transportation  of  milk, 
250. 

Zone  system  of  transcontinental  rates, 
established  by  Interstate  Com- 
merce Commission,  271-275;  modi- 
fication of  order  concerning,  upon 
opening  of  Panama  Canal,  288- 
289. 


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